Back Testing

Back testing is a formal statistical framework that enables verification of the actual losses versus the projected losses by the VaR model. Dirty Back Testing consists of comparing the VaR estimates with the actual P&L values at the end of the time horizon. Clean back testing consists of comparing, still at the end of the time horizon, the VaR estimates with some hypothetical P&L values of the portfolio, having kept its composition unchanged. Clean back testing  means, the same portfolio is re-priced at the end of the time interval, its return is calculated and then compared with the ex-ante value of VaR. UCITS IV regulation states, the back testing should be performed with the use of daily results and for the most recent 250 business days.

 

 

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