In this episode of Quantcast, Carlo Acerbi, head of valuation and quantitative solutions at Banque Pictet in Geneva, discusses his latest paper written with former colleague Balazs Szekely, an economic adviser at the Central Bank of Hungary in Budapest, which proposes a new backtest for expected shortfall (ES).
The new method, developed when the two quants were employed at MSCI, improves on their 2014 proposal by minimising ES backtesting’s sensitivity to the accuracy of value-at-risk prediction.
The bias to VAR predictions is inevitable, but it can be managed. By applying their method, one can not only calculate the probability of errors in the estimate, but also measure the difference between the predicted ES and the realised ES, allowing the error to be adjusted.
Acerbi also shares his views on some parts of the Basel Committee on Banking Regulation’s rules, such as the P&L attribution test, which he considers “a Russian roulette for models”.
00:00 Background history of ES and backtestability
05:55 The new backtest for ES
12:18 As unbiased as possible
15:20 VAR predictions affect ES backtest
18:45 How backtests of VAR and ES compare/sharp backtest
24:10 The P&L attribution controversy
29:55 Is FRTB killing some trading strategies?
To hear the full interview, listen in the player above, or download. Future podcasts in our Quantcast series will be uploaded to Risk.net. You can also visit the main page here to access all tracks, or go to the iTunes store or Google Podcasts to listen and subscribe.