Backtesting Trading Risk of Commercial Banks Using Expected Shortfall
30 Pages Posted: 24 May 2008
This paper uses saddlepoint technique to backtest the trading risk of commercial banks using expected shortfall. It is found that four out of six US commercial banks have excessive trading risks. Monte Carlo simulation studies show that the proposed backtest is very accurate and powerful even for small test samples. More importantly, risk managers can carry out the proposed backtest based on any number of exceptions, so that incorrect risk models can be promptly detected before any further huge losses are realized.
Keywords: Value-at-Risk, expected shortfall, backtesting, saddlepoint technique
JEL Classification: G32
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