Backtesting for Risk-Based Regulatory Capital

F.L.J. Kerkhof, B. Melenberg

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Abstract

In this paper we present a framework for backtesting all currently popular risk measurement methods (including value-at-risk and expected shortfall) using the functional delta method.Estimation risk can be taken explicitly into account.Based on a simulation study we provide evidence that tests for expected shortfall with acceptable low levels have a better performance than tests for value-at-risk in realistic financial sample sizes.We propose a way to determine multiplication factors, and find that the resulting regulatory capital scheme using expected shortfall compares favorably to the current Basle Accord backtesting scheme.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages31
Volume2002-110
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-110

Keywords

  • risk management
  • capital

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