ABC of VaR Model Backtesting
ALRIM co-publishes practical guidelines on VaR backtesting
In light of growing focus on technical risk matters, ALRiM and ALFI Risk Management Committee have teamed up and worked towards issuing practical guidelines and ideas around the topic of backtesting. This research will be shared with ALFI & ALRiM members through a series of three papers covering respectively (i) the basics of backtesting, (ii) potential areas of investigation when VaR models seemingly fail and (iii) governance around backtesting.
‘ABC of VaR Model Backtesting’ is the first instalment in the series presenting the results of this joint effort between ALFI and ALRiM on backtesting of Value-at-Risk (VaR) models. In this first paper, we aim for giving background about what is backtesting, why do it and also provide practical guidelines on how to perform and interpret backtests. Interested practitioners will also find a references section for further reading, an exhaustive glossary of terms used and specific formulas and explanations to implement the statistical tests described.
We hope these may help practitioners extract more value from VaR models and better understand the market risk of their UCITS and other funds using a VaR measure. Given this scope, this paper is intended for risk managers and conducting persons in charge of risk management and adopts a somewhat technical stance.
The first paper, ‘ABC of VaR Model Backtesting’, is available in full to ALRiM and ALFI members on their respective websites http://www.alrim.lu/download-center