Backtesting Value-at-Risk: A GMM Duration-Based Test
This paper proposes a new duration-based backtesting procedure for VaR forecasts. The GMM test framework proposed by Bontemps (2006) to test for the distributional assumption (i.e. the geometric distribution) is applied to the case of the VaR forecasts validity. Using simple J-statistic based on the moments defined by the orthonormal polynomials associated with the geometric distribution, this new approach tackles most of the drawbacks usually associated to duration based backtesting procedures. First, its implementation is extremely easy. Second, it allows for a separate test for unconditional coverage, independence and conditional coverage hypothesis (Christoffersen, 1998). Third, feasibility of the tests is improved. Fourth, Monte-Carlo simulations show that for realistic sample sizes, our GMM test outperforms traditional duration based test. An empirical application for Nasdaq returns confirms that using GMM test leads to major consequences for the ex-post evaluation of the risk by regulation authorities. Without any doubt, this paper provides a strong support for the empirical application of duration-based tests for VaR forecasts.
|Date of creation:||10 Oct 2008|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00329495/en/|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Engle, Robert F & Manganelli, Simone, 1999.
"CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles,"
University of California at San Diego, Economics Working Paper Series
qt06m3d6nv, Department of Economics, UC San Diego.
- Robert F. Engle & Simone Manganelli, 2004. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 367-381, October.
- Robert Engle & Simone Manganelli, 2000. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Econometric Society World Congress 2000 Contributed Papers 0841, Econometric Society.
- Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
- 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.).
- Christian Bontemps & Nour Meddahi, 2002.
"Testing Normality: A GMM Approach,"
CIRANO Working Papers
- DUFOUR, Jean-Marie, 2005.
"Monte Carlo Tests with Nuisance Parameters: A General Approach to Finite-Sample Inference and Nonstandard Asymptotics,"
Cahiers de recherche
03-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Dufour, Jean-Marie, 2006. "Monte Carlo tests with nuisance parameters: A general approach to finite-sample inference and nonstandard asymptotics," Journal of Econometrics, Elsevier, vol. 133(2), pages 443-477, August.
- Jean-Marie Dufour, 2005. "Monte Carlo tests with nuisance parameters: a general approach to finite-sample inference and non-standard asymptotics," CIRANO Working Papers 2005s-02, CIRANO.
- DUFOUR, Jean-Marie, 2005. "Monte Carlo Tests with Nuisance Parameters: A General Approach to Finite-Sample Inference and Nonstandard Asymptotics," Cahiers de recherche 2005-03, Universite de Montreal, Departement de sciences economiques.
- Juan Carlos Escanciano & Jose Olmo, 2007.
"Backtesting Parametric Value-at-Risk with Estimation Risk,"
Caepr Working Papers
2007-005_updated, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Escanciano, J. Carlos & Olmo, Jose, 2010. "Backtesting Parametric Value-at-Risk With Estimation Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 36-51.
- Peter Christoffersen, 2004.
"Backtesting Value-at-Risk: A Duration-Based Approach,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 2(1), pages 84-108.
- Peter Christoffersen & Denis Pelletier, 2003. "Backtesting Value-at-Risk: A Duration-Based Approach," CIRANO Working Papers 2003s-05, CIRANO.
- Escanciano, J. C. & Olmo, J., 2007. "Estimation risk effects on backtesting for parametric value-at-risk models," Working Papers 07/11, Department of Economics, City University London.
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00329495. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.