Backtesting an equity risk model under Solvency II

Pablo Durán Santomil, Luís Otero González, Onofre Martorell Cunill and José M. Merigó Lindahl

Journal of Business Research, 2018, vol. 89, issue C, 216-222

Abstract: Backtesting is a technique for validating internal models under Solvency II, which allows for evaluating the discrepancies between the results provided by a model and real observations. This paper aims to establish various backtesting tests and to show their applications to equity risk in Solvency II. Normal and empirical models with a rolling window are used to determine VaR at the 99.5% confidence level over a one-year time horizon. The proposed methodology performs the backtesting of annualized returns arising from the accumulation of daily returns. The results show that even if a model is conservative when tested out of a sample, it may be inadequate when evaluated in a sample, thereby highlighting the problems inherent in the out-of-sample backtesting proposed by the regulator.

Keywords: Internal models; Solvency II; Backtesting; Validation; Equity risk; Value-at-risk (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:89:y:2018:i:c:p:216-222

DOI: 10.1016/j.jbusres.2018.01.004

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