This paper reviews a variety of backtests that examine the adequacy
of Value-at-Risk (VaR) measures. These backtesting procedures are
reviewed from both a statistical and risk management perspective.
The properties of unconditional coverage and independence are
defined and their relation to backtesting procedures is discussed.
Backtests are then classified by whether they examine the
unconditional coverage property, independence property, or both
properties of a VaR measure. Backtests that examine the accuracy of
a VaR model at several quantiles, rather than a single quantile,
are also outlined and discussed. The statistical power properties
of these tests are examined in a simulation experiment. Finally,
backtests that are specified in terms of a pre-specified loss
function are reviewed and their use in VaR validation is discussed.
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