Looking forward to back testing
To measure market risk, banks usually predict the distribution of the future (and therefore unknown) gains and losses Gt of a portfolio. Modelling gains and losses is achieved by taking into account all relevant information given by observed risk factor prices or returns, respectively. Thus, the relevant conditional univariate one-step-ahead predictive distribution can be denoted by Ft: = Ft(Gt/Rt-1, Rt-2, ... ), where Rt-1, Rt-2, ... describes (multivariate) past risk factor returns. Three main
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