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Basel III Backtesting Overview

Our backtesting process rigorously evaluates portfolios across multiple asset classes and strategies, ensuring compliance with the Basel III framework. Using 20 years of historical data, we simulate performance under both stressed and normal market conditions, validating the robustness of risk management models. The backtesting process follows the guidelines of the Basel III Accords, which focus on assessing market risk and validating the Value at Risk (VaR) measures. This methodology ensures that our risk models are not only accurate but also resilient in various market environments.

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Key Backtesting Settings

Our backtesting model incorporates a number of key parameters designed to assess the risk under various market conditions. Below are the settings used in our evaluation:
ParameterValue
Number of Portfolios1,000 portfolios
Scenarios per Portfolio100,000 scenarios
Backtests per Scenario252 days (1 year of daily data)
Time Horizon10-day holding period
Confidence Level99% (Standard for regulatory requirements)
Interest Rate ModelsVasicek, CIR
Volatility Lookback25 days (reflecting typical volatility calculations)
Market ConditionsNormal and Stressed scenarios
These settings are chosen to provide a comprehensive view of risk, from day-to-day fluctuations to extreme market conditions, ensuring the highest level of accuracy in risk predictions.

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Backtesting Results

The following table summarizes the exceedances of the Value at Risk (VaR) model under the 99% confidence level over the testing period. Exceedances occur when the actual loss exceeds the predicted VaR, helping to assess the effectiveness of the model in extreme conditions.
Exceedances012345678910
Percentage4.47%14.63%21.54%30.89%17.89%6.10%3.25%0.82%0.41%0%0%
  • Exceedances: The number of times the portfolio loss exceeded the predicted VaR at the 99% confidence level.
  • Interpretation: A lower number of exceedances at a 99% confidence level indicates a more reliable risk model. Here, we see that exceedances are well below the expected threshold, ensuring the model’s robustness.

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Basel III Compliance Highlights

In compliance with the Basel III framework, our backtesting process ensures:
  • Capital Adequacy: The model helps determine if the portfolios meet the minimum capital requirements to withstand potential market shocks.
  • Market Risk Assessment: By simulating different market scenarios, we validate the effectiveness of risk mitigation strategies.
  • Stress Testing: A core component of Basel III, stress testing evaluates how portfolios behave under extreme market conditions, such as a financial crisis.
These components collectively allow for an in-depth understanding of the financial risk associated with each portfolio, ensuring that risk exposure is managed and mitigated appropriately.

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Additional Resources