IJFS, Vol. 14, Pages 42: The Relevance of Expected Shortfall Models in Different Time Window Sizes

International Journal of Financial Studies doi: 10.3390/ijfs14020042

Authors:
Marcelo Fukui
Leonardo Fernando Cruz Basso

Risk management has become increasingly important in the financial world. Considering its importance, it is necessary to measure these risks. The financial market uses two risk measures: Value at Risk (VaR) and Expected Shortfall (ES). After the subprime crisis, the market began to emphasize ES instead of VaR. The hypothesis of this paper to be tested is that longer periods provide better information than shorter, more recent periods for measuring ES volatility to hedge trades. The ES can be adopted using parametric, semi-parametric, and non-parametric methods, and the analyses of the log return indicators started on 3 January 2000 and ended on 5 May 2023. The analyses carried out to evaluate these log return indicators covered the period from 6 May 2023 to 1 August 2025, where it was found that the exchange rate volatility of the Brazilian Real exceeded the VaR limits and even reached the Expected Shortfall risk zone. Then, a different analysis was performed, starting on 11 March 2020 and ending on 5 May 2023. This second analysis, as the first analysis, was carried out to evaluate these log return indicators that covered the period from 6 May 2023 to 1 August 2025. In this latest period analysis, the exchange rate volatility of the Brazilian Real reached the Exchange Shortfall risk zone in a different way compared to the first way. All three types of methods—parametric, non-parametric, and semi-parametric—show distinct behaviors depending on the period evaluated. The hypothesis was rejected, but the hedging strategies should account for asset volatility. The software used to calculate the estimators was Microsoft Excel 365 and Stata 14.2.

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