Forecasting Expected Shortfall: Should We Use a Multivariate Model for Stock Market Factors?
42 Pages Posted: 18 Jul 2018 Last revised: 6 Dec 2019
Date Written: December 4, 2019
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: Suggested Citation