Forecasting Expected Shortfall: Should We Use a Multivariate Model for Stock Market Factors?

Abstract

Is univariate or multivariate modelling more e¤ective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead Expected Shortfall of a portfolio invested in the Fama-French and momentum factors. Applying extensive tests and comparisons, we …nd that in most cases there are no statistically signi…cant di¤erences between the forecasting accuracy of the two approaches. This result 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.