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The Real Estate Investment Market: The Current State and Why Advances Are Needed Read chapter Read first chapter

2022 | OriginalPaper | Chapter

8. Backtesting

Authors : W. Brent Lindquist, Svetlozar T. Rachev, Yuan Hu, Abootaleb Shirvani

Published in: Advanced REIT Portfolio Optimization

Publisher: Springer International Publishing

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Abstract

Under regulatory guidelines, banks with substantial trading activity are required to set aside capital to insure against extreme portfolio loss. The size of the capital requirement is determined by the value-at-risk (VaR) of the portfolio. The VaR exposure is determined through a customary set of tests under a procedure referred to as backtesting. This is the subject of this chapter. Eight standard backtests are discussed and applied to historically optimized portfolios of Chaps. 4 and 5 and dynamically optimized portfolios of Chap. 7. Dramatic improvement in the backtests is seen under dynamic optimization. However, improvements in optimization still must be combined with an active management approach incorporating risk-management techniques.

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previous chapter Dynamic Portfolio Optimization: Beyond MPT
next chapter Diversification with Real Estate Stocks
Footnotes
1
For example, prior portfolio returns could be assumed to follow a particular distribution, such as Gaussian. The previous t − T, …, t − 1 daily returns would then be fit to said distribution, and VaRα(rp, t ) would then be computed using the distribution parameters computed from the fit.
 
2
As long as α ≠ 0 or 1, then \( N\alpha =\mathcal{O}(N) \) and \( N\left(1-\alpha \right)=\mathcal{O}(N) \) for sufficiently large N. In practice, it is sufficient to ensure min(Nα, N(1 − α)) ≳ 5, which requires N ≥ 5 max (1/α, 1/(1 − α)).
 
3
Note that P(X ≤ x| N, α) + P(X ≥ x| N, α) = 1 + P(X = x| N, α).
 
4
The CC test is “mixed” because it combines a frequency test (PoF) and an independence test (CCI).
 
Literature
Campbell, S. D. (2005). A review of backtesting and backtesting procedures. Finance and Economic Discussion Series 2005-21. Division of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC.
Christoffersen, P. (1998). Evaluating interval forecasts. International Economic Review, 39, 841–862.CrossRef
Haas, M. (2001). New methods in backtesting. Financial Engineering, Center of Advanced European Studies and Research, Bonn.
Kupiec, P. (1995). Techniques for verifying the accuracy of risk management models. Journal of Derivatives, 3, 73–84.CrossRef
Metadata
Title
Backtesting
Authors
W. Brent Lindquist
Svetlozar T. Rachev
Yuan Hu
Abootaleb Shirvani
Copyright Year
2022
Book
Advanced REIT Portfolio Optimization

Print ISBN: 978-3-031-15285-6

Electronic ISBN: 978-3-031-15286-3

Copyright Year: 2022

DOI
https://doi.org/10.1007/978-3-031-15286-3_8