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Journal of Financial Econometrics Vol. 2, No. 1, pp. 84-108
© 2004 Oxford University Press; all rights reserved.

Backtesting Value-at-Risk: A Duration-Based Approach

Peter Christoffersen
     McGill University, CIRANO, and CIREQ

Denis Pelletier
     North Carolina State University

Address correspondence to Peter Christoffersen, Faculty of Management, 1001 Sherbrooke St. West, Montreal, Quebec, Canada H3A 1G5, or e-mail: peter.christoffersen{at}mcgill.ca.

Financial risk model evaluation or backtesting is a key part of the internal model's approach to market risk management as laid out by the Basle Committee on Banking Supervision. However, existing backtesting methods have relatively low power in realistic small sample settings. Our contribution is the exploration of new tools for backtesting based on the duration of days between the violations of the Value-at-Risk. Our Monte Carlo results show that in realistic situations, the new duration-based tests have considerably better power properties than the previously suggested tests.

KEYWORDS: GARCH, kurtosis, risk model evaluation

Received October 25, 2002; revised March 5, 2003; accepted October 30, 2003


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