Articlehybrid2005

A Review of Backtesting and Backtesting Procedures

126 citations0/0 files storedFinance and Economics Discussion Series

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Financial Risk and Volatility Modeling Risk Management in Financial Firms Risk and Portfolio Optimization

Abstract

This paper reviews a variety of backtests that examine the adequacy of Value-at-Risk (VaR) measures. These backtesting procedures are reviewed from both a statistical and risk management perspective. The properties of unconditional coverage and independence are defined and their relation to backtesting procedures is discussed. Backtests are then classified by whether they examine the unconditional coverage property, independence property, or both properties of a VaR measure. Backtests that examine the accuracy of a VaR model at several quantiles, rather than a single quantile, are also outlined and discussed. The statistical power properties of these tests are examined in a simulation experiment. Finally, backtests that are specified in terms of a pre-specified loss function are reviewed and their use in VaR validation is discussed.

Citations in this library

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References

1998Evaluating Interval Forecasts 1995Techniques for Verifying the Accuracy of Risk Measurement Models 1998Evaluating Density Forecasts with Applications to Financial Risk Management 2001Testing Density Forecasts, With Applications to Risk Management 2002How Accurate Are Value‐at‐Risk Models at Commercial Banks?2004Backtesting Value-at-Risk: A Duration-Based Approach 2005The hidden dangers of historical simulation 1997Evaluating Value at Risk Methodologies: Accuracy versus Computational Time

Cited by

2007Do banks overstate their Value-at-Risk?2013What is the Best Risk Measure in Practice? A Comparison of Standard Measures 2008A New Approach to Comparing VaR Estimation Methods 2015Backtesting general spectral risk measures with application to expected shortfall 2012Pitfalls in backtesting Historical Simulation VaR models 2017A review of backtesting for value at risk

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