Backtesting expected shortfall: evidence from European securitized real estate

ABSTRACT

Events such as the European sovereign debt crisis, terrorism and Brexit cause more uncertainty and volatility in capital markets. This encourages us to use both conditional and unconditional forecasts (backtests) for expected shortfall (ES) in 8 indices of listed European real estate securities and Real estate investment trusts (REITs). Using the method proposed by Du and Escanciano, we find that ES is generally superior to Value-at-Risk in describing and capturing risk during extreme events such as the financial crisis. Our results are important to regulators, risk managers and investors.

KEYWORDS:

• REIT
• expected shortfall
• value-at-risk
• backtesting
• risk management
• European markets

JEL CLASSIFICATION:

• G10

Acknowledgement

We thank Zaichao Du and Juan Carlos Escanciano for sharing their R code.

Disclosure statement

No potential conflict of interest was reported by the author.