A Reveiw of Backtesting and Backtesting Procedures

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 backtest...

Full description

Saved in:
Bibliographic Details
Published in:Policy File 2005
Main Author: Campbell, Sean D
Format: Report
Language:English
Subjects:
Banking/Finance
The Federal Reserve Board
Online Access:Request full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.