What is FiRRM?

The Centre of Finance, Risk and Resource Management (FiRRM) is a team of researchers at the Technical University of Dortmund. We specialize in modern financial applications and risk management. Our focus? Data-driven research within the fields of economics and finance. Our goal? To build a community of talented analysts.

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Using the Extremal Index for VaR Backtesting

A. Bücher, P. Schmidtke, P. N. Posch

We introduce a set of new Value-at-Risk independence backtests by establishing a connection
between the independence property of Value-at-Risk forecasts and the extremal index,
a general measure of extremal clustering of stationary sequences. For this purpose, we introduce
a sequence of relative excess returns whose extremal index is to be estimated. We
compare our backtest to both popular and recent competitors using Monte Carlo simulations
and find considerable power in many scenarios. In an applied section we perform realistic
out-of-sample forecasts with common forecasting models and discuss advantages and pitfalls
of our approach.

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