The Risk Map: A New Tool for Backtesting Value-at-Risk Models
University of Orleans
University of Orleans; Université Paris IX Dauphine
HEC Paris - Finance Department
May 1, 2011
International Conference of the French Finance Association (AFFI), May 11-13, 2011
This paper presents a new tool for validating Value-at-Risk (VaR) models. This tool, called the Risk Map, jointly accounts for the number and the magnitude of the VaR exceptions and graphically summarizes all information about the performance of a risk model. It relies on the concept of VaR super exception, which is de fined as a situation in which the trading loss exceeds both the standard VaR and a VaR defined at an extremely low coverage probability. We then formally test whether the sequence of exceptions and super exceptions passes standard model validation tests. We show that the Risk Map can be used to backtest VaR for market risk, credit risk, or operational risk, to assess the performance of a margining system on a derivatives exchange, and to validate systemic risk measures (e.g. CoVaR).
Number of Pages in PDF File: 29working papers series
Date posted: May 12, 2011
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