A review of backtesting and backtesting procedures

Sean D. Campbell

No 2005-21, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper reviews a variety of backtests that examine the adequacy of Value-at-Risk (VaR) measures. These backtesting procedures are reviewed from both a statistical and risk management perspective. The properties of unconditional coverage and independence are defined and their relation to backtesting procedures is discussed. Backtests are then classified by whether they examine the unconditional coverage property, independence property, or both properties of a VaR measure. Backtests that examine the accuracy of a VaR model at several quantiles, rather than a single quantile, are also outlined and discussed. The statistical power properties of these tests are examined in a simulation experiment. Finally, backtests that are specified in terms of a pre-specified loss function are reviewed and their use in VaR validation is discussed.

Keywords: Risk management; Bank investments (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-ecm and nep-rmg
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Citations: View citations in EconPapers (25)

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