Evaluating Value-at-Risk Models with Desk-Level Data

CREATES Research Paper Series 2009

33 Pages Posted: 5 May 2008  

Jeremy Berkowitz

University of Houston - Department of Finance

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Denis Pelletier

North Carolina State University - Department of Economics

Date Written: July 31, 2007

Abstract

We present new evidence on disaggregated profit and loss (P/L) and Value-at-Risk (VaR) forecasts obtained from a large international commercial bank. Our dataset includes daily P/L generated by four separate business lines within the bank. All four business lines are involved in securities trading and each is observed daily for a period of at least two years. Given this unique dataset, we provide an integrated, unifying framework for assessing the accuracy of VaR forecasts. We use a comprehensive Monte Carlo study to assess which of these many tests have the best finite-sample size and power properties. Our desk-level data set provides importance guidance for choosing realistic P/L generating processes in the Monte Carlo comparison of the various tests. The Caviar test of Engle and Manganelli (2004) performs best overall but duration-based tests also perform well in many cases.

Keywords: Risk Management, Backtesting, Volatility, Disclosure

JEL Classification: G21, G32

Suggested Citation

Berkowitz, Jeremy and Christoffersen, Peter and Pelletier, Denis, Evaluating Value-at-Risk Models with Desk-Level Data (July 31, 2007). CREATES Research Paper Series 2009. Available at SSRN: https://ssrn.com/abstract=1127226 or http://dx.doi.org/10.2139/ssrn.1127226

Jeremy Berkowitz

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Denis Pelletier

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

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