The Risk Map: A New Tool for Validating Risk Models

By Perignon Christophe, Hurlin Christophe, and Colletaz Gilbert
Journal of Banking and Finance (2013)

  • Christophe Perignon

    HEC Paris

    France

  • Christophe Hurlin

    University of Orléans

    France

  • Gilbert Colletaz

    University of Orléans

    France

Created

September 27, 2013

Last update

June 20, 2016

Software

Matlab

Ranking

20

Visits

6693

Downloads

588

Description

The goal of this code is to automatically create a "Risk Map" from a series of Value-at-Risk (VaR) and profit and loss (P&L). Given the time series of VaR(α) and P&L, we generate the corresponding time series for VaR(α'), with α'<α through calibration. This is done by extracting the conditional variance of the P&L from VaR(α) and then plugging it into the formula for VaR(α'). A "super exception" is then defined as P&L < -VaR(α'). We formally test whether the sequence of exceptions and super exceptions satisfies standard backtesting conditions. Finally, the Risk Map graphically summarizes all information about the performance of the risk model.

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