Backtesting Value-at-Risk using Forecasts for Multiple Horizons, a Comment on the Forecast Rationality Tests of A.J. Patton and A. Timmermann
AbstractPatton and Timmermann (2011, Forecast Rationality Tests Based on Multi-Horizon Bounds, Journal of Business & Economic Statistics , forthcoming) propose a set of useful tests for forecast rationality or optimality under squared error loss, including an easily implemented test based on a regression that only involves (long-horizon and short-horizon) forecasts and no observations on the target variable. We propose an extension, a simulation-based procedure that takes into account the presence of errors in parameter estimates. This procedure can also be applied in the field of 'backtesting' models for Value-at-Risk. Applications to simple AR and ARCH time series models show that its power in detecting certain misspecifications is larger than the power of well-known tests for correct Unconditional Coverage and Conditional Coverage.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 2011-131/4.
Date of creation: 20 Sep 2011
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Value-at-Risk; backtest; optimal revision; forecast rationality;
Other versions of this item:
- Lennart F. Hoogerheide & Francesco Ravazzolo & Herman K. van Dijk, 2011. "Backtesting Value-at-Risk using Forecasts for Multiple Horizons, a Comment on the Forecast Rationality Tests of A.J. Patton and A. Timmermann," Tinbergen Institute Discussion Papers 11-131/4, Tinbergen Institute.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- 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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- Hoogerheide, Lennart & van Dijk, Herman K., 2010.
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- HOOGERHEIDE, Lennart F. & KAASHOEK, Johan F. & VAN DIJK, Herman K., 2005.
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- Lennart Hoogerheide & Anne Opschoor & Herman K. van Dijk, 2011. "A Class of Adaptive EM-based Importance Sampling Algorithms for Efficient and Robust Posterior and Predictive Simulation," Tinbergen Institute Discussion Papers 11-004/4, Tinbergen Institute.
- Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2012. "Time-varying Combinations of Predictive Densities using Nonlinear Filtering," Tinbergen Institute Discussion Papers 12-118/III, Tinbergen Institute.
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