Sean D. Campbell
The Federal Reserve Board, Mail Stop 91, 20th Street and Constitution Avenue NW, Washington, DC 20551, USA
This paper reviews a variety of backtests that examine the accuracy of value-at-risk (VAR) measures. These backtesting procedures are reviewed from both a statistical and a 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 percentiles, rather than a single percentile, are also outlined and discussed. The statistical power properties of these tests are examined in a simulation experiment.