Expected shortfall: end of the back-test quest?
Ever since regulators suggested replacing value-at-risk with expected shortfall, the industry has been debating how and whether it can be back-tested. Quants at MSCI are proposing three methods. Nazneen Sherif introduces this month’s technical articles
From the start, expected shortfall has suffered in comparison with one of the key advantages of the measure it is supposed to be replacing: it cannot be back-tested, critics claimed, while tests of value-at-risk are simple and intuitive.
Regulators have ploughed on regardless. Expected shortfall has been endorsed as VAR's successor in two consultation papers on the Fundamental review of the trading book because of its supposed benefits as a measure of tail risk. The widely contested solution to
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