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Spectral backtests unbounded and folded

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Abstract

In the spectral backtesting framework of Gordy and McNeil (JBF, 2020) a probability measure on the unit interval is used to weight the quantiles of greatest interest in the validation of forecast models using probability-integral transform (PIT) data. We extend this framework to allow general Lebesgue-Stieltjes kernel measures with unbounded distribution functions, which brings powerful new tests based on truncated location-scale families into the spectral class. Moreover, by considering uniform distribution preserving transformations of PIT values the test framework is generalized to allow tests that are focused on both tails of the forecast distribution.

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  • Michael B. Gordy & Alexander J. McNeil, 2024. "Spectral backtests unbounded and folded," Finance and Economics Discussion Series 2024-060, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-60
    DOI: 10.17016/FEDS.2024.060
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    References listed on IDEAS

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    1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    2. O’Brien, James & Szerszeń, Paweł J., 2017. "An evaluation of bank measures for market risk before, during and after the financial crisis," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 215-234.
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    More about this item

    Keywords

    Backtesting; Volatility; Risk management;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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