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A new set of improved Value-at-Risk backtests

Author

Listed:
  • Ziggel, Daniel
  • Berens, Tobias
  • Weiß, Gregor N.F.
  • Wied, Dominik

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.

Suggested Citation

  • Ziggel, Daniel & Berens, Tobias & Weiß, Gregor N.F. & Wied, Dominik, 2014. "A new set of improved Value-at-Risk backtests," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 29-41.
    • Handle: RePEc:eee:jbfina:v:48:y:2014:i:c:p:29-41
    DOI: 10.1016/j.jbankfin.2014.07.005
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    More about this item

    Keywords

    Value-at-Risk; Backtesting; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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