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Backtesting

In: Advanced REIT Portfolio Optimization

Author

Listed:
  • W. Brent Lindquist

    (Texas Tech University)

  • Svetlozar T. Rachev

    (Texas Tech University)

  • Yuan Hu

    (University of California San Diego)

  • Abootaleb Shirvani

    (Kean University)

Abstract

Under regulatory guidelines, banks with substantial trading activity are required to set aside capital to insure against extreme portfolio loss. The size of the capital requirement is determined by the value-at-risk (VaR) of the portfolio. The VaR exposure is determined through a customary set of tests under a procedure referred to as backtesting. This is the subject of this chapter. Eight standard backtests are discussed and applied to historically optimized portfolios of Chaps. 4 and 5 and dynamically optimized portfolios of Chap. 7 . Dramatic improvement in the backtests is seen under dynamic optimization. However, improvements in optimization still must be combined with an active management approach incorporating risk-management techniques.

Suggested Citation

  • W. Brent Lindquist & Svetlozar T. Rachev & Yuan Hu & Abootaleb Shirvani, 2022. "Backtesting," Dynamic Modeling and Econometrics in Economics and Finance, in: Advanced REIT Portfolio Optimization, chapter 0, pages 113-129, Springer.
    • Handle: RePEc:spr:dymchp:978-3-031-15286-3_8
    DOI: 10.1007/978-3-031-15286-3_8
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