Backtesting the filtered historical simulation for the VaR estimation of the Prague stock market index

January 2013
ECON - Journal of Economics, Management & Business;2013, Vol. 23 Issue 1, p15
Academic Journal
Nowadays, Value at Risk is the most frequently utilised measure of risk. It is used not only by financial institutions and their regulatory authorities, but also by other companies. There is a number of methods for the Value at Risk calculation. In this paper, we focus on one of them -- filtered historical simulation. This method assumes the mean return and variance to be conditional. The goal of the paper is to backtest this method for the Value at Risk estimation on investment into the Prague stock market index. The accuracy of the method is verified by statistical tests. In particular, Kupiec's unconditional test and Christoffersen's conditional coverage test are applied. From the results, it is apparent that the filtered historical simulation is an accurate method for the Value at Risk estimation, but the bunching of exceptions is problematic, mostly at lower probability levels.


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