Bayesian Value-at-Risk Backtesting: The Case of Annuity Pricing

Melvern Leung, Youwei Li, Athanasios Pantelous and Samuel Vigne

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a new Unconditional Coverage backtest for VaR-forecasts under a Bayesian framework that significantly minimise the direct and indirect effects of p-hacking or other biased outcomes in decision-making, in general. Especially, after the global financial crisis of 2007-09, regulatory demands from Basel III and Solvency II have required a more strict assessment setting for the internal financial risk models. Here, we employ linear and nonlinear Bayesianised variants of two renowned mortality models to put the proposed backtesting technique into the context of annuity pricing. In this regard, we explore whether the stressed longevity scenarios are enough to capture the experienced liability over the foretasted time horizon. Most importantly, we conclude that our Bayesian decision theoretic framework quantitatively produce a strength of evidence favouring one decision over the other.

Keywords: Bayesian decision theory; Value-at-Risk; Backtesting; Annuity pricing; Longevity risk (search for similar items in EconPapers)
JEL-codes: C11 C12 C44 G13 G17 G22 G23 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Bayesian Value-at-Risk backtesting: The case of annuity pricing (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:101698

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