Backtesting Value-at-Risk Models

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi Nieppola, Olli 2011-11-14T11:23:09Z 2011-11-14T11:23:09Z 2009
dc.description.abstract Value-at-Risk has become one of the most popular risk measurement techniques in finance. However, VaR models are useful only if they predict future risks accurately. In order to evaluate the quality of the VaR estimates, the models should always be backtested with appropriate methods. Backtesting is a statistical procedure where actual profits and losses are systematically compared to corresponding VaR estimates. The main contribution of this thesis consists of empirical studies. The empirical part of the thesis is carried out in close cooperation with a Finnish institutional investor. The primary objective of the study is to examine the accuracy of a VaR model that is being used to calculate VaR figures in the company’s investment management unit. As a secondary objective the empirical research tries to figure out which backtests are the most reliable, and which tests are suitable for forthcoming model validation processes in the company. The performance of the VaR model is measured by applying several different tests of unconditional coverage and conditional coverage. Three different portfolios (equities, bonds and equity options) with daily VaR estimates for one year time period are used in the backtesting process. The results of the backtests provide some indication of potential problems within the system. Severe underestimation of risk is discovered, especially for equities and equity options. However, the turbulent market environment causes problems in the evaluation of the backtesting outcomes since VaR models are known to be accurate only under normal market conditions. en
dc.format.extent 78
dc.format.mimetype application/pdf en
dc.language.iso en en
dc.title Backtesting Value-at-Risk Models en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Economics en
dc.contributor.department Department of Economics en
dc.contributor.department Kansantaloustieteen laitos fi
dc.subject.keyword risk management
dc.subject.keyword riskienhallinta
dc.subject.keyword Value at Risk
dc.subject.keyword VaR
dc.subject.keyword backtesting
dc.identifier.urn URN:NBN:fi:aalto-201111151093
dc.type.dcmitype text en
dc.programme.major Economics en
dc.programme.major Kansantaloustiede fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon kansantaloustiede
dc.subject.helecon economics
dc.subject.helecon riski
dc.subject.helecon risk
dc.subject.helecon riskienhallinta
dc.subject.helecon risk management
dc.subject.helecon arviointi
dc.subject.helecon evaluation
dc.subject.helecon mallit
dc.subject.helecon models
dc.ethesisid 12049 2009-03-30
dc.location P1 I

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