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Risk Model Backtesting

Authors: Terzic, Ivica; Milojevic, Marko; Terzic, Ivica; Milojevic, Marko;

Risk Model Backtesting

Abstract

Within this paper we shall research the validation methods of the risk model and we shall provide an overview of the existing literature which deals with validation and performance assessment of the VaR (Value at Risk) model. The importance of backtesting of the risk model stems from the fact that credit institutions have been allowed by regulatory bodies to use internal model-based approach to market risk measurement and based on such assessments, to determine the capital adequacy. Therefore, the regulator has developed a “traffic light” approach for the backtesting model. However, the last financial crisis has shown that this approach of model validation has failed to provide valid assessments of the VaR model, which has further led to significant underestimation of the risk and a collapse of many banks worldwide. For this very reason, the academic literature has been focused more than ever before, on proposal and development of new techniques for the verification of the risk model. Therefore, the aim of this paper is to provide a comparative overview of the validation methods of the market risk model, which have evolved during the past several years.

Keywords

Risk and Uncertainty, bank, Value at Risk, back testing, market risk

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
0
Average
Average
Average
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