Show simple item record Escanciano, Juan Carlos Olmo, Jose 2007-04-17T18:02:21Z 2007-04-17T18:02:21Z 2007-03-19
dc.identifier.uri en
dc.identifier.uri en
dc.description This paper has been revised. The revised version is at
dc.description.abstract One of the implications of the creation of Basel Committee on Banking Supervision was the implementation of Value-at-Risk (VaR) as the standard tool for measuring market risk. Thereby the correct specification of parametric VaR models became of crucial importance in order to provide accurate and reliable risk measures. If the underlying risk model is not correctly specified, VaR estimates understate/overstate risk exposure. This can have dramatic consequences on stability and reputation of financial institutions or lead to sub-optimal capital allocation. We show that the use of the standard unconditional backtesting procedures to assess VaR models is completely misleading. These tests do not consider the impact of estimation risk and therefore use wrong critical values to assess market risk. The purpose of this paper is to quantify such estimation risk in a very general class of dynamic parametric VaR models and to correct standard backtesting procedures to provide valid inference in specification analyses. A Monte Carlo study illustrates our theoretical findings in finite-samples. Finally, an application to S&P500 Index shows the importance of this correction and its impact on capital requirements as imposed by Basel Accord, and on the choice of dynamic parametric models for risk management. en
dc.format.extent 488151 bytes
dc.format.mimetype application/pdf
dc.language.iso en_US en
dc.publisher Center for Applied Economics and Policy Research en
dc.relation.ispartofseries CAEPR Working Papers en
dc.relation.ispartofseries 2007-005 en
dc.relation.isversionof This paper is also available on SSRN and RePEc. en
dc.subject CAEPR en
dc.subject Center for Applied Economics and Policy Research en
dc.subject Backtesting en
dc.subject Basel Accord en
dc.subject Model Risk en
dc.subject Risk Management en
dc.subject Value at Risk en
dc.subject Conditional Quantile en
dc.title Estimation Risk Effects on Backtesting for Parametric Value-at-Risk Models en
dc.type Working Paper en

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