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Back-Testing the Effectiveness of Value at Risk Model

Author

Listed:
  • Sanel HALILBEGOVIC

    (International Burch University)

  • Nedim CELEBIC

    (International Burch University)

  • Adisa ARAPOVIC

    (International Burch University)

  • Mia VEHABOVIC

    (International Burch University)

Abstract

Value at risk (VaR) is the biggest loss of portfolio that can be expected in the reporting period, with a given level of confidence. Research aims to estimate the effectiveness and accuracy of VaR models, while estimating which test used for back-testing is most reliable in evaluating the VaR model accuracy. Various back-testing methods are used for examining exception frequency and results indicate that the VaR models used are accurate at almost all levels of confidence with only a small possibility of risks and problems. Five tests including Point of Failure, Time until First Failure, Basel Traffic Light, Christoffersen's Independence test and Mixed Kupiec test will be performed to evaluate if the respective method for VaR calculation is consistent. Limitations in the back-testing process are linked to the fact that VaR models are accurate only under normal market conditions.

Suggested Citation

  • Sanel HALILBEGOVIC & Nedim CELEBIC & Adisa ARAPOVIC & Mia VEHABOVIC, 2019. "Back-Testing the Effectiveness of Value at Risk Model," Romanian Journal of Economics, Institute of National Economy, vol. 48(1(57)), pages 05-33, June.
    • Handle: RePEc:ine:journl:v:48:y:2019:i:57:p:05-33
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    Cited by:

    1. Danai Likitratcharoen & Pan Chudasring & Chakrin Pinmanee & Karawan Wiwattanalamphong, 2023. "The Efficiency of Value-at-Risk Models during Extreme Market Stress in Cryptocurrencies," Sustainability, MDPI, vol. 15(5), pages 1-21, March.

    More about this item

    Keywords

    Value at risk; Back-testing; Kupiec; Christoffersen; Basel Traffic Light;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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