Journal Article

The Geometric-VaR Backtesting Method

Denis Pelletier and Wei Wei

in Journal of Financial Econometrics

Volume 14, issue 4, pages 725-745
Published in print September 2016 | ISSN: 1479-8409
Published online July 2015 | e-ISSN: 1479-8417 | DOI: https://dx.doi.org/10.1093/jjfinec/nbv015
The Geometric-VaR Backtesting Method

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  • Econometric and Statistical Methods and Methodology: General
  • Banking
  • Corporate Governance

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This article develops a new test to evaluate value-at-risk (VaR) forecasts. VaR is a standard risk measure widely utilized by financial institutions and regulators, yet estimating VaR is a challenging problem, and popular VaR forecast relies on unrealistic assumptions. Hence, assessing the performance of VaR is of great importance. We propose the geometric-VaR test which utilizes the duration between the violations of VaR as well as the value of VaR. We conduct a Monte Carlo study based on desk-level data and we find that our test has high power against various alternatives.

Keywords: risk management; backtesting; volatility; duration; value at risk; C12; G21; G32

Journal Article.  8497 words.  Illustrated.

Subjects: Econometric and Statistical Methods and Methodology: General ; Banking ; Corporate Governance

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