VPD Risk & Performance: Value-At-Risk (VaR) Backtesting, UCITS IV

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11 November 2015

Value-at-Risk (VaR) is a widely used risk measure and its calculation is a complex task, with many mathematical and statistical assumptions, so VaR models have to be tested using statistical tools.  The Committee of European Securities Regulators (CESR) issued guidelines stating that UCITS must monitor the reliability and effectiveness of the risk model using a backtesting program. This concluded that VaR is only as good as its backtest.

The CESR guidelines stipulated that:

·         Backtesting must provide a comparison, for each business day between the one-day 99% VaR results and the fluctuation over one day of the portfolio’s value.

·         UCITS must undertake the backtesting program at least on a monthly basis.

·         If the percentage of breaches appears too high, the VaR model should be reviewed.

·         Breaches are to be reported to senior management on a quarterly basis, if the number of breaches for the most recent 250 business days exceeds the 99% confidence interval.

VPD Risk & Performance with VPD Professional Services can help ensure that your systems, data and methodologies facilitate the VaR backtesting. VPD Risk & Performance has been used by our clients to conduct this backtesting, calculated in accordance with UCITS IV, with any external risk provider’s VaR and Profit and Loss. The data management solutions automate the entire workflow, consolidating and centralising the data, identifying all breaches, and aggregating the number of breaches for assessment.

The flow specifically:

·         Categorises all funds that have been selected for backtesting.

·         Automates the import of VaR and Profit and Loss numbers into VPD Risk & Performance.

·         Identifies breaches, producing reports and data views within the VPD Web Portal.

·         Aggregates breaches across the 250-day history and assesses this against the given limit.

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