Question

Backtesting is usually conducted on a short horizon, such as daily frequency. Explain why.

Answer 1

Backtesting measure the accuracy of the value at risk.The loss forecast calculated by the value at risk is compared with the actual losses at the end of the specified time horizon.Backtesting in value at risk is used to compare the predicted losses from the calculated value at risk with the actual losses realized at the end of the specified time horizon.This comparison identifies the period where the value at risk is underestimated or where the investment losses are greater than the original value at risk.Value of risk prediction can be recalculated if the backtesting values are not accurate,thereby reducing the risk of unexpected losses.Backtesting is usually conducted on a short horizon to reduce the risk of unexpected losses.