Ivica Terzić, Marko Milojević


The purpose of this paper is to evaluate performance of value-at-risk (VaR) produced by two risk models: historical simulation and Risk Metrics. We perform three backtest: unconditional coverage, independence and conditional coverage. We present results on both VaR 1% and VaR 5% on a one-day horizon for the following indices: S&P 500, DAX, SAX, PX and Belex 15. Our results show that Historical simulation 500 days rolling window approach satisfies unconditional coverage for all tested indices, while Risk Metrics has many rejection cases. On the other hand Risk Metrics model satisfies independence backtest for three indices, while Historical simulation has rejected more times. Based on our strong criteria to accept accuracy of VaR models only if both unconditional coverage and independence properties are satisfied, results indicate that during the crisis period all tested VaR models underestimate the true level of market risk exposure.

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DOI: http://dx.doi.org/10.12955/cbup.v1.17


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