Backtesting VaR Models: A Τwo-Stage Procedure

Timotheos Angelidis and Stavros Degiannakis

MPRA Paper from University Library of Munich, Germany

Abstract: Academics and practitioners have extensively studied Value-at-Risk (VaR) to propose a unique risk management technique that generates accurate VaR estimations for long and short trading positions. However, they have not succeeded yet as the developed testing frameworks have not been widely accepted. A two-stage backtesting procedure is proposed in order a model that not only forecasts VaR but also predicts the loss beyond VaR to be selected. Numerous conditional volatility models that capture the main characteristics of asset returns (asymmetric and leptokurtic unconditional distribution of returns, power transformation and fractional integration of the conditional variance) under four distributional assumptions (normal, GED, Student-t, and skewed Student-t) have been estimated to find the best model for three financial markets (US stock, gold and dollar-pound exchange rate markets), long and short trading positions, and two confidence levels. By following this procedure, the risk manager can significantly reduce the number of competing models.

Keywords: Backtesting; Value-at-Risk; Expected Shortfall; Volatility Forecasting; Arch Models (search for similar items in EconPapers)
JEL-codes: C22 C52 G15 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published in Journal of Risk Model Validation 2.1(2007): pp. 27-48

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Related works:
Working Paper: Backtesting VaR Models: A Τwo-Stage Procedure (2007)
Journal Article: Backtesting VaR models:a two-stage procedure
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:80418

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