The Estimation Risk in Extreme Systemic Risk Forecasts
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arXiv
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| Format: | Preprint |
| Published: |
2023
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| _version_ | 1866912339008159744 |
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| author | Hoga, Yannick |
| author_facet | Hoga, Yannick |
| contents | Systemic risk measures have been shown to be predictive of financial crises and declines in real activity. Thus, forecasting them is of major importance in finance and economics. In this paper, we propose a new forecasting method for systemic risk as measured by the marginal expected shortfall (MES). It is based on first de-volatilizing the observations and, then, calculating systemic risk for the residuals using an estimator based on extreme value theory. We show the validity of the method by establishing the asymptotic normality of the MES forecasts. The good finite-sample coverage of the implied MES forecast intervals is confirmed in simulations. An empirical application to major US banks illustrates the significant time variation in the precision of MES forecasts, and explores the implications of this fact from a regulatory perspective. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2304_10349 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | The Estimation Risk in Extreme Systemic Risk Forecasts Hoga, Yannick Methodology Risk Management Systemic risk measures have been shown to be predictive of financial crises and declines in real activity. Thus, forecasting them is of major importance in finance and economics. In this paper, we propose a new forecasting method for systemic risk as measured by the marginal expected shortfall (MES). It is based on first de-volatilizing the observations and, then, calculating systemic risk for the residuals using an estimator based on extreme value theory. We show the validity of the method by establishing the asymptotic normality of the MES forecasts. The good finite-sample coverage of the implied MES forecast intervals is confirmed in simulations. An empirical application to major US banks illustrates the significant time variation in the precision of MES forecasts, and explores the implications of this fact from a regulatory perspective. |
| title | The Estimation Risk in Extreme Systemic Risk Forecasts |
| topic | Methodology Risk Management |
| url | https://arxiv.org/abs/2304.10349 |