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Murphy Diagrams: Forecast Evaluation of Expected Shortfall

Ziegel, Johanna F. ; Krueger, Fabian ; Jordan, Alexander ; Fasciati, Fernando

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Abstract

Motivated by the Basel 3 regulations, recent studies have considered joint forecasts of Value-at-Risk and Expected Shortfall. A large family of scoring functions can be used to evaluate forecast performance in this context. However, little intuitive or empirical guidance is currently available, which renders the choice of scoring function awkward in practice. We therefore develop graphical checks (Murphy diagrams) of whether one forecast method dominates another under a relevant class of scoring functions, and propose an associated hypothesis test. We illustrate these tools with simulation examples and an empirical analysis of S&P 500 and DAX returns.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0632
Date Deposited: 12 May 2017 12:39
Date: 12 May 2017
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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