The Risk Map: A New Tool for Validating Risk Models

40 Pages Posted: 4 May 2011 Last revised: 14 Mar 2013

See all articles by Gilbert Colletaz

Gilbert Colletaz

University of Orleans

Christophe Hurlin

University of Orleans

Christophe Perignon

HEC Paris - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: October 5, 2012

Abstract

This paper presents a new method to validate risk models: the Risk Map. This method jointly accounts for the number and the magnitude of extreme losses and graphically summarizes all information about the performance of a risk model. It relies on the concept of a super exception, which is defined as a situation in which the loss exceeds both the standard Value-at-Risk (VaR) and a VaR defined at an extremely low coverage probability. We then formally test whether the sequences of exceptions and super exceptions are rejected by standard model validation tests. We show that the Risk Map can be used to validate market, credit, operational, or systemic risk estimates (VaR, stressed VaR, expected shortfall, and CoVaR) or to assess the performance of the margin system of a clearing house.

Keywords: Financial risk management, Tail Risk, Basel III

JEL Classification: G21, G28, G32

Suggested Citation

Colletaz, Gilbert and Hurlin, Christophe and Perignon, Christophe, The Risk Map: A New Tool for Validating Risk Models (October 5, 2012). Available at SSRN: https://ssrn.com/abstract=1824984 or http://dx.doi.org/10.2139/ssrn.1824984

Gilbert Colletaz

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

Christophe Hurlin

University of Orleans ( email )

Université d'Orléans
Rue de Blois B.P. 6739 45
France

Christophe Perignon (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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