E-backtesting

Understand

In the recent Basel Accords, the Expected Shortfall (ES) replaces the Value-at-Risk (VaR) as the standard risk measure for market risk in the banking sector, making it the most important risk measure in financial regulation.

• One of the most challenging tasks in risk modeling practice is to backtest ES forecasts provided by financial institutions.
• To design a model-free backtesting procedure for ES, we make use of the recently developed techniques of e-values and e-processes.
• Backtest e-statistics are introduced to formulate e-processes for risk measure forecasts, and unique forms of backtest e-statistics for VaR and ES are characterized using recent results on identification functions.