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Backtesting Value-at-Risk: A GMM Duration-Based Test

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Listed:
  • Bertrand Candelon
  • Gilbert Colletaz
  • Christophe Hurlin
  • Sessi Tokpavi

Abstract

This paper proposes a new duration-based backtesting procedure for value-at-risk (VaR) forecasts. The GMM test framework proposed by Bontemps (2006) to test for the distributional assumption (i.e., the geometric distribution) is applied to the case of the VaR forecasts validity. Using simple J-statistic based on the moments defined by the orthonormal polynomials associated with the geometric distribution, this new approach tackles most of the drawbacks usually associated to duration-based backtesting procedures. An empirical application for Nasdaq returns confirms that using GMM test leads to major consequences for the expost evaluation of the risk by regulation authorities. JEL: C22, C52, G28 Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Bertrand Candelon & Gilbert Colletaz & Christophe Hurlin & Sessi Tokpavi, 2011. "Backtesting Value-at-Risk: A GMM Duration-Based Test," Journal of Financial Econometrics, Oxford University Press, vol. 9(2), pages 314-343, Spring.
    • Handle: RePEc:oup:jfinec:v:9:y:2011:i:2:p:314-343
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    References listed on IDEAS

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    4. Peter Christoffersen, 2004. "Backtesting Value-at-Risk: A Duration-Based Approach," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 84-108.
    5. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-862, November.
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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