Affiliation:
1. Heidelberg University and Heidelberg Institute for Theoretical Studies (HITS)
2. University of Alabama
3. University of Konstanz
Abstract
Abstract
We propose forecast encompassing tests for the expected shortfall (ES) jointly with the value at risk (VaR) based on flexible link (or combination) functions. Our setup allows testing encompassing for convex forecast combinations and for link functions that preclude crossings of the combined VaR and ES forecasts. As the tests based on these link functions involve parameters that are on the boundary of the parameter space under the null hypothesis, we derive and base our tests on nonstandard asymptotic theory on the boundary. Our simulation study shows that the encompassing tests based on our new link functions outperform tests based on unrestricted linear link functions for one-step and multistep forecasts. We further illustrate the potential of the proposed tests in a real data analysis for forecasting VaR and ES of the S&P 500 index.
Funder
University of Hohenheim, the Klaus Tschira Foundation, and the University of Konstanz
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Finance
Cited by
2 articles.
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