EconPapers    
Economics at your fingertips  
 

Early Detection Techniques for Market Risk Failure

Jose Olmo () and William Pouliot

Studies in Nonlinear Dynamics & Econometrics, 2011, vol. 15, issue 4, 1-55

Abstract: The implementation of appropriate statistical techniques (backtesting) for monitoring conditional VaR models is the mechanism used by financial institutions to determine the severity of departures of the VaR model from market results and subsequently, the tool used by regulators to determine the penalties imposed for inadequate risk models. So far, however, there has been no attempt to determine the timing of this rejection and with it to obtain some guidance regarding the cause of failure in reporting an appropriate VaR. This paper corrects this by proposing U-statistic type processes that extend standard CUSUM statistics widely employed for change-point detection. In contrast to CUSUM statistics these new tests are indexed by certain weight functions that enhance their statistical power to detect the timing of the market risk model failure. These tests are robust to estimation risk and can be devised to be very sensitive to detection of market failure produced early in the out-of-sample evaluation period, in which standard methods usually fail due to the absence of data.

Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://www.degruyter.com/view/j/snde.2011.15.issu ... .1800.xml?format=INT (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: Early Detection Techniques for Market Risk Failure (2008) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:sndecm:v:15:y:2011:i:4:n:1

Ordering information: This journal article can be ordered from
https://www.degruyter.com/view/j/snde

Access Statistics for this article

Studies in Nonlinear Dynamics & Econometrics is currently edited by Bruce Mizrach

More articles in Studies in Nonlinear Dynamics & Econometrics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().

 
Page updated 2019-09-20
Handle: RePEc:bpj:sndecm:v:15:y:2011:i:4:n:1