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Elements of Financial Risk Management, 2nd Edition by Peter Christoffersen

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13. Backtesting and Stress Testing
The objective in this chapter is to consider the ex ante risk measure forecasts from the model and compare them with the ex post realized portfolio return. The risk measure forecast could take the form of a Value-at-Risk (VaR), an Expected Shortfall (ES), the shape of the entire return distribution, or perhaps the shape of the left tail of the distribution only. We need to be able to backtest any of these risk measures of interest. The backtest procedures developed in this chapter can be seen as a final diagnostic check on the aggregate risk model, thus complementing the various specific diagnostics covered in previous chapters. The discussion on backtesting is followed by a section on stress testing at the end ...

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