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

44 Pages Posted: 18 Jul 2018 Last revised: 7 Dec 2021

See all articles by Alain-Philippe Fortin

Alain-Philippe Fortin

University of Geneva

Jean-Guy Simonato

HEC Montréal

Georges Dionne

HEC Montreal - Department of Finance

Date Written: June 25, 2020

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 stock portfolio based on its exposures to the Fama-French and momentum
factors. Applying extensive 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 multivariate factor based models, can be used to forecast the downside risk of equity
portfolios without losses in precision.

Keywords: Fama-French and momentum factors, Value-at-Risk, Expected Shortfall, Condi- tional Value-at-Risk, Elicitability, Model comparison, Backtesting, Comparative predictive ac- curacy, Model confidence set

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? (June 25, 2020). Available at SSRN: https://ssrn.com/abstract=3203049 or http://dx.doi.org/10.2139/ssrn.3203049

Alain-Philippe Fortin

University of Geneva ( email )

Geneva
Switzerland

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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