A New Set of Improved Value-at-Risk Backtests
40 Pages Posted: 26 Aug 2013 Last revised: 8 Jul 2014
Date Written: July 8, 2014
Abstract
We propose a new set of formal backtests for VaR-forecasts that significantly improve upon existing backtesting procedures. Our new test of unconditional coverage can be used for both one-sided and two-sided testing, which leads to a significantly increased power. Second, we stress the importance of testing the property of independent and identically distributed (i.i.d.) VaR-exceedances and propose a simple approach that explicitly tests for the presence of clusters in VaR-violation processes. Results from a simulation study indicate that our tests significantly outperform competing backtests in several distinct settings.
Keywords: Value-at-Risk, backtesting, Monte Carlo simulation
JEL Classification: C52, C53, C58
Suggested Citation: Suggested Citation
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