Staff Reports
Regulatory Evaluation of Value-At-Risk Models
December 1997 Number 33
JEL classification: G15

Author: Jose A. Lopez

Beginning in 1998, U.S. commercial banks may determine their regulatory capital requirements for financial market risk exposure using value-at-risk (VaR) models i.e., models of the time-varying distributions of portfolio returns. Currently, regulators have available three hypothesis-testing methods for evaluating the accuracy of VaR models: the binomial method, the interval forecast method and the distribution forecast method. These methods use hypothesis tests to examine whether the VaR forecasts in question exhibit properties characteristic of accurate VaR forecasts. However, given the low power often exhibited by these tests, these methods may often misclassify forecasts from inaccurate models as accurate. A new evaluation method that uses loss functions based on probability forecasts, is proposed. Simulation results indicate that this method is capable of differentiating between forecasts from accurate and inaccurate, alternative VaR models.

Available only in PDFPDF32 pages / 166 kb

For a published version of this report, see Jose A. Lopez, "Regulatory Evaluation of Value-at-Risk Models," Journal of Risk 1, no. 2 (winter 1998/1999): 37-64.

By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close