BinomialBacktest {Dowd}

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

Description

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).

Usage

BinomialBacktest(x, n, cl)

Arguments

x

Number of failures

n

Number of observations

cl

Confidence level for VaR

Value

Probability that the VaR model is correct

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.

Examples

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