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Backtesting for Risk-Based Regulatory Capital

Author

Listed:
  • Kerkhof, F.L.J.

    (Tilburg University, Center For Economic Research)

  • Melenberg, B.

    (Tilburg University, Center For Economic Research)

Abstract

In this paper we present a framework for backtesting all currently popular risk measurement methods (including value-at-risk and expected shortfall) using the functional delta method.Estimation risk can be taken explicitly into account.Based on a simulation study we provide evidence that tests for expected shortfall with acceptable low levels have a better performance than tests for value-at-risk in realistic financial sample sizes.We propose a way to determine multiplication factors, and find that the resulting regulatory capital scheme using expected shortfall compares favorably to the current Basle Accord backtesting scheme.
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Suggested Citation

  • Kerkhof, F.L.J. & Melenberg, B., 2002. "Backtesting for Risk-Based Regulatory Capital," Discussion Paper 2002-110, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:2363cf81-9720-41f2-913c-f3f18542ac20
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    References listed on IDEAS

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    More about this item

    Keywords

    risk management; capital;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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