The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page A Review of Backtesting and Backtesting Procedures
Sean D. Campbell

Abstract: This paper reviews a variety of backtests that examine the adequacy of Value-at-Risk (VaR) measures. These backtesting procedures are reviewed from both a statistical and risk management perspective. The properties of unconditional coverage and independence are defined and their relation to backtesting procedures is discussed. Backtests are then classified by whether they examine the unconditional coverage property, independence property, or both properties of a VaR measure. Backtests that examine the accuracy of a VaR model at several quantiles, rather than a single quantile, are also outlined and discussed. The statistical power properties of these tests are examined in a simulation experiment. Finally, backtests that are specified in terms of a pre-specified loss function are reviewed and their use in VaR validation is discussed.

Keywords: VaR, backtesting

Full paper (175 KB PDF)

Home | FEDS | List of 2005 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: June 1, 2005