METHODS OF VALIDATING THE MODELS FOR MEASURING MARKET RISK – BACKTESTING
Abstract:
This paper analyses the methods for validation of risk model and provides an overview of the present literature related to the validation and evaluation of VaR model success. The importance of validating a risk model originates from the fact that financial institutions are authorised by regulatory bodies to use in-house models for the evaluation of VaR and assess capital adequacy based on that. To that end, the regulator has also developed the so-called „traffic light “approach for model back testing. However, the latest financial crisis has shown that such an approach to model validation did not provide good evaluations of VaR model, which severely underestimated risk and led to failure of many banks throughout the world. Due to that, academic literature is more than ever focused on reviewing and developing new techniques and procedures for the risk model verification. Therefore, the aim of this paper is to offer a comparative overview of market risk validation models that have evolved over the last few years.
CITATION:
IEEE format
I. Terzić, M. Milojević, Z. Jeremić, “METHODS OF VALIDATING THE MODELS FOR MEASURING MARKET RISK – BACKTESTING,” in FINIZ 2015 - Contemporary Financial Management, Belgrade, Singidunum University, Serbia, 2015, pp. 161-166. doi: 10.15308/finiz-2015-161-166
APA format
Terzić, I., Milojević, M., Jeremić, Z. (2015). METHODS OF VALIDATING THE MODELS FOR MEASURING MARKET RISK – BACKTESTING. Paper presented at FINIZ 2015 - Contemporary Financial Management. doi:10.15308/finiz-2015-161-166
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