Evaluating the forecasts of risk models

Jeremy Berkowitz

No 1999-11, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The forecast evaluation literature has traditionally focused on methods for assessing point-forecasts. However, in the context of risk models, interest centers on more than just a single point of the forecast distribution. For example, value-at-risk (VaR) models, which are currently in extremely wide, use form interval forecasts. Many other important financial calculations also involve estimates not summarized by a point-forecast. Although some techniques are currently available for assessing interval and density forecasts, none are suitable for sample sizes typically available. This paper suggests a new approach to evaluating such forecasts. It requires evaluation of the entire forecast distribution, rather than a value-at-risk quantity. The information content of forecast distributions combined with ex post loss realizations is enough to construct a powerful test even with sample sizes as small as 100.

Keywords: Forecasting; Risk (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-cfn and nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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