BinomialBacktest function

Carries out the binomial backtest for a VaR risk measurement model.

The basic idea behind binomial backtest (also called basic frequency test) is to test whether the observed frequency of losses that exceed VaR is consistent with the frequency of tail losses predicted by the mode. Binomial Backtest carries out the binomial backtest for a VaR risk measurement model for specified VaR confidence level and for a one-sided alternative hypothesis (H1).

BinomialBacktest(x, n, cl)

Arguments

• x: Number of failures
• n: Number of observations
• cl: Confidence level for VaR

Returns

Probability that the VaR model is correct

Examples

# Probability that the VaR model is correct for 3 failures, 100 number
   # observations and  95% confidence level
   BinomialBacktest(55, 1000, 0.95)

Author(s)

Dinesh Acharya

References

Dowd, Kevin. Measuring Market Risk, Wiley, 2007.

Kupiec, Paul. Techniques for verifying the accuracy of risk measurement models, Journal of Derivatives, Winter 1995, p. 79.