APPLICATION OF EXPONENTIAL SMOOTHING TECHNIQUE IN ESTIMATING CONDITIONAL EXPECTED SHORTFALL OF A FINANCIAL PORTFOLIO

Joel C. Chelule

Volume : VI, Issue : XII, December - 2017

APPLICATION OF EXPONENTIAL SMOOTHING TECHNIQUE IN ESTIMATING CONDITIONAL EXPECTED SHORTFALL OF A FINANCIAL PORTFOLIO

Joel C. Chelule

Abstract :

Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk. Expected shortfall is an important tool of risk measurement, and therefore, estimation of Expected Shortfall is important in financial risk management. In this paper, we explore exponential smoothing technique in estimating the conditional expected shortfall of the returns of a financial portfolio. We give the estimators of the conditional mean, conditional volatility and Value–at–Risk and show that they are consistent under some conditions. To test the practicability of the theories developed, an empirical study is undertaken using the share prices of Kenya Commercial Bank.