New methodology ends debate as to whether Expected Shortfall can be
backtested
Company Website:
http://www.msci.com
NEW YORK -- (Business Wire)
MSCI
Inc. (NYSE: MSCI), a leading provider of investment decision support
tools worldwide, announced today that it has developed a methodology to
backtest Expected Shortfall, a risk measure that has been proposed by
the Basel Committee on Banking Supervision as an alternative to Value at
Risk (VaR).
In 2012, the Basel Committee proposed as part of its first consultative
paper Fundamental Review of Trading Book Capital Requirements to
change the measurement method for calculating losses from the method of
Value at Risk - a metric banks have used since 1996 to calculate
regulatory capital requirements - to an alternative known as ‘Expected
Shortfall’ which regulators believe will better capture the extreme
losses that can occur in times of systemic turmoil. However, a key
concern with using Expected Shortfall has always been that, unlike Value
at Risk, it cannot be backtested due to a theoretical debate around its
mathematically property called elicitability. Because of this
debate, in its second consultative paper in October 2013, the Basel
Committee suggested adopting Expected Shortfall to measure risk, but
continuing to backtest using Value at Risk.
New groundbreaking research from MSCI solves this dilemma by
demonstrating that it is not only possible to backtest Expected
Shortfall, but that the methodology MSCI has created is a more
informative test of model performance than the current Value at Risk
backtesting methodology.
“This exciting development from MSCI’s research team is another example
of our focus on innovation and serving the needs of the Risk office,”
said Jorge Mina, Managing Director at MSCI. “Now that we have
established that Expected Shortfall can be backtested, we can remove
this issue from the debate and focus on how firms can best capture tail
risk and hence help strengthen capital standards for market risk.”
The soon to be published paper Backtesting Expected Shortfall by
Carlo Acerbi, PhD and Executive Director at MSCI and Balazs Szekely, PhD
and Senior Researcher at MSCI, is one of many produced by MSCI’s 150+
strong research team - one of the largest research organizations in the
industry. As well as publishing proprietary applied and model research,
MSCI has also been commissioned by some of the world’s largest investors
to carry out research on areas such as factor investing.
MSCI is a leader in providing Risk and Performance products and services
to many of the leading asset owners, asset managers, hedge funds and
banks across the globe. Its best in class risk systems today provide
multiple views of risk, including factor model analysis, stress testing,
Value at Risk, Expected Shortfall and other sensitivity based analytics,
and enable clients to undertake the Expected Shortfall backtesting
described in the forthcoming paper.
About MSCI
MSCI Inc. is a leading provider of investment decision support tools to
investors globally, including asset managers, banks, hedge funds and
pension funds. MSCI products and services include indexes, portfolio
risk and performance analytics, and ESG data and research.
The company’s flagship product offerings are: the MSCI indexes with over
USD 9 trillion estimated to be benchmarked to them on a worldwide basis1;
Barra multi-asset class factor models, portfolio risk and performance
analytics; RiskMetrics multi-asset class market and credit risk
analytics; IPD real estate information, indexes and analytics; MSCI ESG
(environmental, social and governance) Research screening, analysis and
ratings; and FEA valuation models and risk management software for the
energy and commodities markets. MSCI is headquartered in New York, with
research and commercial offices around the world.
1As of March 31, 2014, as reported on June 25,
2014, by eVestment, Lipper and Bloomberg
For further information on MSCI, please visit our web site at www.msci.com
Contacts:
Media Enquiries:
MSCI, New York
Michele Clarke, +
1.646.732.5079
or
MSCI, London
Jo Morgan, +
44.20.7618.2224
or
MHP Communications, London
Nick Denton
| Christian Pickel
+ 44.20.3128.8754/8208
or
MSCI Global
Client Service:
EMEA Client Service + 44.20.7618.2222
Americas
Client Service 1.888.588.4567 (toll free)/+ 1.212.804.3901
Asia
Pacific Client Service + 852.2844.9333
Source: MSCI Inc.
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