The Ridge Backtest for Expected Shortfall: Properties and applications
Speaker: Carlo Acerbi, PhD - LARIX risk consulting and Bocconi University, Milan
We illustrate the "ridge backtest" for Expected Shortfall (ES) (proposed in Acerbi and Szekely (2017, 2019)) in the context of the FRTB IMA (Fundamental Review of the Trading Book - Internal Model Approach) ES-based regulation which is coming into effect soon. This backtest is shown to have unique optimal properties that solve the longstanding puzzle on whether ES can be backtested at all. Besides providing a viable effective backtest, the proposed method provides richer information than traditional VaR backtests, in the form of prediction discrepancy metrics in monetary terms. This permits actionable capital management diagnostics and remediation, and opens the door to the advent of adaptive risk models. We discuss in particular the relevance that this method could have for model validation of FRTB IMAs.
Carlo Acerbi is a quantitative financial risk management researcher and professional, author of relevant contributions in the field of banking regulation (2002 coherent definition of ES ; 2019 ES backtesting), asset management liquidity regulation (2013 MSCI LiquidityMetrics) and stress testing (2016 MSCI ST best practices), among others.He received a PhD in Theoretical Physics (1998, ISAS-SISSA, Trieste, Italy).
He served for major institutions in the financial risk industry (Banca Intesa, Abaxbank, McKinsey, RiskMetrics-MSCI, Banque Pictet) and teaches Advanced Derivatives at Bocconi University, Milan and he's Honorary Professor at Corvinus University, Budapest.
Thurs, December 8, 2022 5 – 6 pm
In-Person Viewing: Babbio 431