The Geometric-VaR Backtesting Method

Denis Pelletier and Wei Wei

Journal of Financial Econometrics, 2016, vol. 14, issue 4, 725-745

Abstract: This article develops a new test to evaluate value-at-risk (VaR) forecasts. VaR is a standard risk measure widely utilized by financial institutions and regulators, yet estimating VaR is a challenging problem, and popular VaR forecast relies on unrealistic assumptions. Hence, assessing the performance of VaR is of great importance. We propose the geometric-VaR test which utilizes the duration between the violations of VaR as well as the value of VaR. We conduct a Monte Carlo study based on desk-level data and we find that our test has high power against various alternatives.

Date: 2016
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