Forecasting Expected Shortfall with a Generalized Asymmetric Student-T Distribution

19 Pages Posted: 12 Nov 2009  

Dongming Zhu

Peking University

John W. Galbraith

McGill University - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Date Written: May 1, 2009

Abstract

Financial returns typically display heavy tails and some skewness, and conditional variance models with these features often outperform more limited models. The difference in performance may be especially important in estimating quantities that depend on tail features, including risk measures such as the expected shortfall. Here, using a recent generalization of the asymmetric Student-t distribution to allow separate parameters to control skewness and the thickness of each tail, we fit daily financial returns and forecast expected shortfall for the S&P 500 index and a number of individual company stocks; the generalized distribution is used for the standardized innovations in a nonlinear, asymmetric GARCH-type model. The results provide empirical evidence for the usefulness of the generalized distribution in improving prediction of downside market risk of financial assets.

Keywords: asymmetric distribution, expected shortfall, GARCH model

JEL Classification: C16, G10

Suggested Citation

Zhu, Dongming and Galbraith, John W., Forecasting Expected Shortfall with a Generalized Asymmetric Student-T Distribution (May 1, 2009). CIRANO - Scientific Publications Paper No. 2009s-24. Available at SSRN: https://ssrn.com/abstract=1504109 or http://dx.doi.org/10.2139/ssrn.1504109

Dongming Zhu

Peking University ( email )

School of International Studies
Beijing, 100871
China

John W. Galbraith (Contact Author)

McGill University - Department of Economics ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

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