Forecasting Expected Shortfall: Should we use a Multivariate Model for Stock Market Factors?
This question is examined in the context of forecasting the one-week-ahead Expected Shortfall for a portfolio equally invested in the Fama-French and momentum factors.
Applying extensive tests and comparisons, we find that in most cases there are no statistically signicant differences between the forecasting accuracy of the two approaches.
This suggests that univariate models, which are more parsimonious and simpler to implement than multivariate models, can be used to forecast the downsize risk of equity portfolios without losses in precision.
BIS now uses expected shortfall for capital regulation of market risk Click to read this article.