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Backtesting Value-at-Risk: From Dynamic Quantile to Dynamic Binary Tests

Author

Listed:
  • Elena Ivona Dumitrescu

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Christophe Hurlin

  • Vinson Pham

Abstract

In this paper we propose a new tool for backtesting that examines the quality of Value-at- Risk (VaR) forecasts. To date, the most distinguished regression-based backtest, proposed by Engle and Manganelli (2004), relies on a linear model. However, in view of the di- chotomic character of the series of violations, a non-linear model seems more appropriate. In this paper we thus propose a new tool for backtesting (denoted DB) based on a dy- namic binary regression model. Our discrete-choice model, e.g. Probit, Logit, links the sequence of violations to a set of explanatory variables including the lagged VaR and the lagged violations in particular. It allows us to separately test the unconditional coverage, the independence and the conditional coverage hypotheses and it is easy to implement. Monte-Carlo experiments show that the DB test exhibits good small sample properties in realistic sample settings (5% coverage rate with estimation risk). An application on a portfolio composed of three assets included in the CAC40 market index is nally proposed.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Elena Ivona Dumitrescu & Christophe Hurlin & Vinson Pham, 2012. "Backtesting Value-at-Risk: From Dynamic Quantile to Dynamic Binary Tests," Post-Print hal-01385901, HAL.
    • Handle: RePEc:hal:journl:hal-01385901
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