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Backtesting Lambda Value at Risk

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  • Jacopo Corbetta
  • Ilaria Peri

Abstract

A new risk measure, the lambda value at risk (Lambda VaR), has been recently proposed from a theoretical point of view as a generalization of the value at risk (VaR). The Lambda VaR appears attractive for its potential ability to solve several problems of the VaR. In this paper we propose three nonparametric backtesting methodologies for the Lambda VaR which exploit different features. Two of these tests directly assess the correctness of the level of coverage predicted by the model. One of these tests is bilateral and provides an asymptotic result. A third test assess the accuracy of the Lambda VaR that depends on the choice of the P&L distribution. However, this test requires the storage of more information. Finally, we perform a backtesting exercise and we compare our results with the ones from Hitaj and Peri (2015)

Suggested Citation

  • Jacopo Corbetta & Ilaria Peri, 2016. "Backtesting Lambda Value at Risk," Papers 1602.07599, arXiv.org, revised Jun 2017.
    • Handle: RePEc:arx:papers:1602.07599
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    References listed on IDEAS

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    1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Asmerilda Hitaj & Cesario Mateus & Ilaria Peri, 2018. "Lambda Value at Risk and Regulatory Capital: A Dynamic Approach to Tail Risk," Risks, MDPI, vol. 6(1), pages 1-18, March.

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