Forecasting Value at Risk and Expected Shortfall Using a Semiparametric Approach Based on the Asymmetric Laplace Distribution

Value at Risk (VaR) forecasts can be produced from conditional autoregressive VaR models, estimated using quantile regression. Quantile modeling avoids a distributional assumption, and allows the dynamics of the quantiles to differ for each probability level. However, by focusing on a quantile, these models provide no information regarding expected shortfall (ES), which is the expectation of the exceedances beyond the quantile. We introduce a method for predicting ES corresponding to VaR forecasts produced by quantile regression models. It is well known that quantile regression is equivalent to maximum likelihood based on an asymmetric Laplace (AL) density. We allow the density's scale to be time-varying, and show that it can be used to estimate conditional ES. This enables a joint model of conditional VaR and ES to be estimated by maximizing an AL log-likelihood. Although this estimation framework uses an AL density, it does not rely on an assumption for the returns distribution. We also use the AL log-likelihood for forecast evaluation, and show that it is strictly consistent for the joint evaluation of VaR and ES. Empirical illustration is provided using stock index data. Supplementary materials for this article are available online.