Back-Testing the Effectiveness of Value at Risk Model

Sanel Halilbegovic (), Nedim Celebic (), Adisa Arapovic () and Mia Vehabovic
Additional contact information
Sanel Halilbegovic: International Burch University
Nedim Celebic: International Burch University
Adisa Arapovic: International Burch University
Mia Vehabovic: International Burch University

Romanian Journal of Economics, 2019, vol. 48, issue 1(57), 05-33

Abstract: Value at risk (VaR) is the biggest loss of portfolio that can be expected in the reporting period, with a given level of confidence. Research aims to estimate the effectiveness and accuracy of VaR models, while estimating which test used for back-testing is most reliable in evaluating the VaR model accuracy. Various back-testing methods are used for examining exception frequency and results indicate that the VaR models used are accurate at almost all levels of confidence with only a small possibility of risks and problems. Five tests including Point of Failure, Time until First Failure, Basel Traffic Light, Christoffersen's Independence test and Mixed Kupiec test will be performed to evaluate if the respective method for VaR calculation is consistent. Limitations in the back-testing process are linked to the fact that VaR models are accurate only under normal market conditions.

Keywords: Value at risk; Back-testing; Kupiec; Christoffersen; Basel Traffic Light (search for similar items in EconPapers)
JEL-codes: D81 G11 G32 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.revecon.ro/articles/2019-1/2019-1-1.pdf (application/pdf)

Related works:
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:ine:journl:v:48:y:2019:i:57:p:05-33

Access Statistics for this article

Romanian Journal of Economics is currently edited by Institute of National Economy

More articles in Romanian Journal of Economics from Institute of National Economy Contact information at EDIRC.
Bibliographic data for series maintained by Valentina Vasile ().