kupiec paul - techniques for verifying the accuracy of risk measurement models
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8/19/2019 Kupiec Paul - Techniques for Verifying the Accuracy of Risk Measurement Models
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TECHNIQUES FOR VERIFYING
THE ACCURACY
RISK
MEASUREMENT
MO E
Paul
H
Kupiec
is a senior economist with the Board Governors of the
Federal Reserve System
in Washington, D.C.
Risk
exposures
are
typically
quantified in terms a
value
at risk IiflR estimate. A UlR estimate corresponds
to a specific critical
value
of a porifolio s
potential
one-day
profit and
loss
probability distribution.
Given
their function
both as
internal
risk management
tools
and as potential
reg
ulatory measures risk exposure, it is important to quantify
the accuracy
an institution s UlR estimates.
This study
shows
that the formal
statistical
proce
dures that would typically be used in performance-based
UlR
verification
tests require
large
samples
to
produce
a
reli-
T
hi s study
considers alternative
statistical
techniques that could be used to verify the
accuracy
of
estimates
of
the tail values
of
the distribution
of
potential gains and losses
for a por tfol io
of
securities, futures, and derivative
positions. These so-called reality checks have
been
advanced as a tool for determining the accuracy
of
risk exposure estimates generated by risk measure
ment models.
able
assessment
of a
model s
accuracy
and likelihood of very
low
probability
test statistics based on historical
tradi
have
very poor power in small samples,
possible for a bank orits supervisor to
a UlR estimate unless many
years
available.
Historical simulation-based v
tics also require long
samples
to gene
Estimates 0 01 critical
values
exhi
even
in
samples
as large
as
ten years
A VaR estimate corresponds
cal value of a portfolio's potential
loss probability distribution. Typica
is defined to be a loss large enough
bility that the portfolio could post
most some specified value, like 1
VaR measure thus corresponds to
critical value
of
the portfolio's po
loss distribution.
T h e J
o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 . D o w n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m
b y A b e l G a r c i a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o m a k e
u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w
a r d t o a n u n a u t h o r i z e d u s e r o r t o p o s t
e l e c t r o n i c a l l y w i t h o u t P u b l i s h e r p e r m i s s i o n .
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a
o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w i t h o u t P u b l i s h e r p e r m i s s i o n .
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a
o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
-
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a
o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
-
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a
o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
-
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o
m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d
t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w
n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o
m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d
t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w
n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o
m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d
t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
-
8/19/2019 Kupiec Paul - Techniques for Verifying the Accuracy of Risk Measurement Models
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w
n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o
m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d
t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
-
8/19/2019 Kupiec Paul - Techniques for Verifying the Accuracy of Risk Measurement Models
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w
n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o
m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d
t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
-
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T h e J o u r n a l o f D e r i v a t i v e s 1 9 9 5 . 3 . 2 : 7 3 - 8 4 .
D o w
n l o a d e d f r o m w
w w . i
i j o u r n a l s . c o m b
y A b e l G a r c i
a o n 0 8 / 0 9 / 1 2 .
I t i s i l l e g a l t o
m a k e u n a u t h o r i z e d c o p i e s o f t h i s a r t i c l e ,
f o r w a r d
t o a n u n a u t h o r i z e d u s e r o r t o p o s t e l e c t r o n i c a l l y w
i t h o u t P u b l i s h e r p e r m i s s i o n .
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