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MRMM-8-backtesting-var.html
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<!doctype html>
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<head>
<meta charset="utf-8">
<title>Market Risk Measurement and Management | Chapter 8 | Backtesting VaR</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 8</h1>
<h3>Backtesting VaR</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<ul>
<li>Model validation - the general process of checking whether a model is adequate</li>
<li>Backtesting - a formal statistical framework that consists of verifying that actual losses are in line with projected losses</li>
</ul>
<aside class="notes">
It is important to vet your VaR models for faulty assumptions, wrong parameters, or inaccurate modeling.
</aside>
</section>
<section>
<h2>Setup for Backtesting</h2>
<p>In a well-calibrated model, the number of observations falling outside VaR should be aligned with the confidence level</p>
</section>
<section>
<h2>Model Backtesting with Exceptions</h2>
<ul>
<li>Classic statistical decision problem: accept or reject the hypothesis</li>
<li>Failure rate - the proportion of times VaR is exceeded in a given sample</li>
<li>Type I error - rejecting a correct model</li>
<li>Type II error - not rejecting an incorrect model</li>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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