Forecasting Expected Shortfall: Should We Use a Multivariate Model for Stock Market Factors?

42 Pages Posted: 18 Jul 2018 Last revised: 6 Dec 2019

See all articles by Alain-Philippe Fortin

Alain-Philippe Fortin

HEC Montreal

Jean-Guy Simonato

HEC Montréal

Georges Dionne

HEC Montreal - Department of Finance

Date Written: December 4, 2019

Abstract

Is univariate or multivariate modelling more effective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead Expected Shortfall of a portfolio invested in the Fama-French and momentum factors. Apply ingextensive tests and comparisons, we find that in most cases there are no statistically significant differences between the forecasting accuracy of the two approaches. This result suggests that univariate models, which are more parsimonious and simpler to implement than multivariatemodels, can be used to forecast the downsize risk of equity portfolios without losses in precision.

Keywords: Value-at-Risk, Expected Shortfall, Conditional Value-at-Risk, Elicitability, modelcomparison, backtesting, Fama-French and momentum factors

JEL Classification: C22, C32, C52, C53, G17

Suggested Citation

Fortin, Alain-Philippe and Simonato, Jean-Guy and Dionne, Georges, Forecasting Expected Shortfall: Should We Use a Multivariate Model for Stock Market Factors? (December 4, 2019). Available at SSRN: https://ssrn.com/abstract=3203049 or http://dx.doi.org/10.2139/ssrn.3203049

Alain-Philippe Fortin

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Jean-Guy Simonato

HEC Montréal ( email )

3000, chemin de la Cote-Sainte-Catherine
Service de l'enseignement de la finance
Montreal, Quebec H3T 2A7
Canada
514-340-6807 (Phone)
514-340-5632 (Fax)

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

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