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Backtesting Value-at-Risk Using Forecasts for Multiple Horizons, a Comment on the Forecast Rationality Tests of A.J. Patton and A. Timmermann


Lennart F. Hoogerheide


Vrije Universiteit Amsterdam - Dept. of Econometrics

Francesco Ravazzolo


Norges Bank

H. K. Van Dijk


Tinbergen Institute; Econometric Institute

September 20, 2011

Tinbergen Institute Discussion Paper 11-131/4

Abstract:     
Patton and Timmermann (2011, 'Forecast Rationality Tests Based on Multi-Horizon Bounds', Journal of Business & Economic Statistics, forthcoming) propose a set of useful tests for forecast rationality or optimality under squared error loss, including an easily implemented test based on a regression that only involves (long-horizon and short-horizon) forecasts and no observations on the target variable. We propose an extension, a simulation-based procedure that takes into account the presence of errors in parameter estimates. This procedure can also be applied in the field of 'backtesting' models for Value-at-Risk. Applications to simple AR and ARCH time series models show that its power in detecting certain misspecifications is larger than the power of well-known tests for correct Unconditional Coverage and Conditional Coverage.

Number of Pages in PDF File: 17

Keywords: value-at-Risk, backtest, optimal revision, forecast rationality

JEL Classification: C12, C52, C53, C58, G32

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Date posted: September 20, 2011  

Suggested Citation

Hoogerheide, Lennart F. and Ravazzolo, Francesco and van Dijk, H. K., Backtesting Value-at-Risk Using Forecasts for Multiple Horizons, a Comment on the Forecast Rationality Tests of A.J. Patton and A. Timmermann (September 20, 2011). Tinbergen Institute Discussion Paper 11-131/4. Available at SSRN: http://ssrn.com/abstract=1930841 or http://dx.doi.org/10.2139/ssrn.1930841

Contact Information

Lennart F. Hoogerheide (Contact Author)
Vrije Universiteit Amsterdam - Dept. of Econometrics ( email )
De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands
Francesco Ravazzolo
Norges Bank ( email )
P.O. Box 1179
Oslo, N-0107
Norway

Herman K. Van Dijk
Tinbergen Institute ( email )
Gustav Mahlerplein 117
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)
HOME PAGE: http://people.few.eur.nl/hkvandijk/
Econometric Institute ( email )
P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4088955 (Phone)
+31 10 4527746 (Fax)
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