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Encompassing Tests for Value at Risk and Expected Shortfall Multistep Forecasts Based on Inference on the Boundary

Encompassing Tests for Value at Risk and Expected Shortfall Multistep Forecasts Based on Inference on the Boundary

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DIMITRIADIS, Timo, Xiaochun LIU, Julie SCHNAITMANN, 2022. Encompassing Tests for Value at Risk and Expected Shortfall Multistep Forecasts Based on Inference on the Boundary. In: Journal of Financial Econometrics. Oxford University Press. 4(6), nbab004. ISSN 1479-8409. eISSN 1479-8417. Available under: doi: 10.1093/jjfinec/nbab004

@article{Dimitriadis2022-11Encom-57501, title={Encompassing Tests for Value at Risk and Expected Shortfall Multistep Forecasts Based on Inference on the Boundary}, year={2022}, doi={10.1093/jjfinec/nbab004}, number={6}, volume={4}, issn={1479-8409}, journal={Journal of Financial Econometrics}, author={Dimitriadis, Timo and Liu, Xiaochun and Schnaitmann, Julie}, note={Article Number: nbab004} }

Liu, Xiaochun 2022-05-11T12:49:23Z Liu, Xiaochun eng Schnaitmann, Julie 2022-05-11T12:49:23Z Dimitriadis, Timo Encompassing Tests for Value at Risk and Expected Shortfall Multistep Forecasts Based on Inference on the Boundary Dimitriadis, Timo 2022-11 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. Schnaitmann, Julie

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