Journal of Operational Risk

Risk.net

Measuring expected shortfall under semi-parametric expected shortfall approaches: a case study of selected Southern European/Mediterranean countries

Nikola Radivojević, Borislav Bojić and Marija Lakićević

  • The HS models, which are based on certain transformed historical data, can reliably be used for the estimation of a market risk in terms of the Basel III standards.
  • The incorporation of the volatility models co-opting the leverage effect contributes to the improvement of the applicability of these models.
  • The first step in testing the validity of risk models, in the context of Basel III rules, implies VaR backtesting.

We investigate the applicability of semi-parametric approaches for estimating expected shortfall. More precisely, we examine the applicability of several models based on the historical simulation (HS) approach: one based on untransformed historical data, and others based on transformed historical data. Our research shows that the HS models based on certain transformed historical data can reliably be used for the estimation of market risk in terms of the Basel III standards. This investigation was conducted on the capital markets of selected Southern European/Mediterranean countries and those of Serbia and Ireland. Our backtesting results were verified using Monte Carlo testing and the bootstrap method.

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