Backtesting

Abstract

Abstract We survey methods for backtesting risk models using theex anterisk measure forecasts from the model and theex postrealized portfolio profit or loss. The risk measure forecast can take the form of a Value at Risk, an expected shortfall, or a distribution forecast. The backtesting can be seen as a final diagnostic check on the aggregate risk model carried out by the risk management team that constructed the risk model or they can be used by external model evaluators such as bank supervisors. The approaches suggested require only information on the dailyex anterisk model forecast and the dailyex postcorresponding profit and loss. In particular, knowledge about the assumptions behind the risk model and its construction is not required.

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