A sequential method for the evaluation of the VaR model based on the run between exceedances

Summary:

A technique for sequential assessment of the appropriateness of the VaR model is developed, by drawing on a tool from statistical process control, namely the control chart. We show that an EWMA control chart is the most appropriate instrument for detecting changes in the process of the magnitude of interest in risk management. The robustness of our procedure with respect to violations of some assumptions is examined and it is concluded that our model evaluation technique remains suitable in such cases.