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The Risk Map: A new tool for validating risk models

Gilbert Colletaz, Christophe Hurlin () and Christophe Pérignon

Journal of Banking & Finance, 2013, vol. 37, issue 10, 3843-3854

Abstract: This paper presents a new method to validate risk models: the Risk Map. This method jointly accounts for the number and the magnitude of extreme losses and graphically summarizes all information about the performance of a risk model. It relies on the concept of a super exception, which is defined as a situation in which the loss exceeds both the standard Value-at-Risk (VaR) and a VaR defined at an extremely low probability. We then formally test whether the sequences of exceptions and super exceptions are rejected by standard model validation tests. We show that the Risk Map can be used to validate market, credit, operational, or systemic risk estimates (VaR, stressed VaR, expected shortfall, and CoVaR) or to assess the performance of the margin system of a clearing house.

Keywords: Financial risk management; Tail risk; Basel III (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2013
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