Department Seminar by Hongda Hu

Wednesday, March 24, 2021 4:00 pm - 4:00 pm EDT (GMT -04:00)

Please Note: This seminar will be given online.

Student seminar series

Hongda Hu
University of Waterloo  

Link to join seminar: Hosted on Microsoft Teams

Comparison between Value at Risk and Expected Shortfall

In October 2013, a consultation paper from the Basel Committee on Banking Supervision decided to replace Value at Risk (VaR) with Expected Shortfall (ES) as the international standard for banking supervision. However, VaR is still commonly used among most financial institutions. One of the reasons for this is that ES is not backtestable. Backtestibility of ES is now a popular and important problem. In this presentation, I will give a brief introduction to the two risk measures (VaR and ES) and compare them in terms of coherence. Then, elicitability is introduced as an important mathematical property for backtesting. In the presentation, I will define elicitability and discuss the possibility of elicitability on mean, variance, VaR and ES. The result shows that ES cannot be backtested through scoring functions due to lack of elicitability. However, it can be shown that backtesting ES can still be achieved through joint elicitability of (VaR, ES).