Early Detection Techniques for Market Risk Failure
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Jose Olmo
The implementation of appropriate statistical techniques (backtesting) for monitoring conditional VaR models is the mechanism used by financial institutions to determine the severity of departures of the VaR model from market results and subsequently, the tool used by regulators to determine the penalties imposed for inadequate risk models. So far, however, there has been no attempt to determine the timing of this rejection and with it to obtain some guidance regarding the cause of failure in reporting an appropriate VaR. This paper corrects this by proposing U-statistic type processes that extend standard CUSUM statistics widely employed for change-point detection. In contrast to CUSUM statistics these new tests are indexed by certain weight functions that enhance their statistical power to detect the timing of the market risk model failure. These tests are robust to estimation risk and can be devised to be very sensitive to detection of market failure produced early in the out-of-sample evaluation period, in which standard methods usually fail due to the absence of data.
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Artikel in diesem Heft
- Article
- Early Detection Techniques for Market Risk Failure
- Beta Autoregressive Transition Markov-Switching Models for Business Cycle Analysis
- A Computationally Practical Robust Simulation Estimator for Dynamic Panel Tobit Models
- Panel Cointegration Rank Testing with Cross-Section Dependence
- Constrained k-class Estimators in the Presence of Weak Instruments
- Stages of Economic Development in an Innovation-Education Growth Model
Artikel in diesem Heft
- Article
- Early Detection Techniques for Market Risk Failure
- Beta Autoregressive Transition Markov-Switching Models for Business Cycle Analysis
- A Computationally Practical Robust Simulation Estimator for Dynamic Panel Tobit Models
- Panel Cointegration Rank Testing with Cross-Section Dependence
- Constrained k-class Estimators in the Presence of Weak Instruments
- Stages of Economic Development in an Innovation-Education Growth Model
