Risk Forecast#
A forward-looking estimate of potential loss or adverse outcomes.
Important
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What it is#
A risk forecast predicts a risk measure — most often VaR or Expected Shortfall — for a future period. Because VaR is a quantile, forecasting it means forecasting the \(\tau\)-quantile of future returns given today’s information; the quantity is unobserved and estimated ahead of time.
How it’s done#
Methods forecast the future return distribution (or just its scale): GARCH-family volatility models (forecast the variance, then scale a distributional quantile), historical simulation, Extreme Value Theory for the far tail, quantile regression, and hybrids of these.
How it’s judged#
By backtesting: over a long out-of-sample run, the fraction of days the loss breaches the forecast VaR should match the stated level (about 1% of days for 99% VaR). Too many breaches means risk was under-forecast. This discipline is vital for banks, risk managers and regulators.
Theme: Risk & Probabilistic Forecasting · All terminology
Hint
Mind map — connected ideas
Value-at-Risk (VaR) · Return Distribution · Probabilistic Forecasts · Quantile Regression · Probabilistic Scoring · Forecast Error
Hint
More in Risk & Probabilistic Forecasting
Continuous Probabilistic Forecasts · Continuous Ranked Probability Score (CRPS) · Deterministic forecasts · Full Distribution · Pinball Loss (a.k.a. Quantile Loss) · Point Forecasts · Predicting Percentiles · Prediction Intervals (PI) · Probabilistic Forecasts · Probabilistic Scoring · Probability Forecasts · Quantile Forecasts · Quantile Level · Quantile Regression
See also
Source article Adapted (context, re-expressed) in our own words from: Risk Forecast (insightful-data-lab.com).