Stress Testing And Backtesting

Stress Testing and Back Testing [9]

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Bullet points include: Approx 11% chance of >4 overshoots even if model perfectly reliable. Lots of funds and lots of periods in the (longer-term) future. 1 day VaR back testing and 1 month holding period not consistent. What causes extreme events? Time-varying world. Crowded trades etc. ‘Risk’ vs. ‘uncertainty’, see e.g. Kemp (2010)

Bullet points include: Approx 11% chance of >4 overshoots even if model perfectly reliable. Lots of funds and lots of periods in the (longer-term) future. 1 day VaR back testing and 1 month holding period not consistent. What causes extreme events? Time-varying world. Crowded trades etc. ‘Risk’ vs. ‘uncertainty’, see e.g. Kemp (2010)

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