The Role of Backtesting of VaR Models
1. Discuss, in approximately 1200 words, the role of backtesting of
VaR models in portfolio management, and the associated limitations
of VaR models.
[30 marks]
A useful reference for backtesting is Lucas, A., (2001), “Evaluating the
Basle Guidelines for Backtesting Banks’ Internal Risk Management
Models,” Journal of Money, Credit and Banking, Vol. 33, No. 3. In
particular, one should read p826-831 and the concluding remarks.
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