VaR Backtest
Validates the VaR model by counting historical breaches.
VaR backtesting compares actual losses against the VaR threshold to validate model accuracy. A 95% VaR should be breached about 5% of the time. If breaches occur significantly more often, the VaR model is underestimating risk. The Kupiec test provides a statistical measure of whether the breach rate is acceptable.
Value at Risk (VaR)
The maximum expected loss at a given confidence level — but doesn't tell you how bad the tail is.
CVaR / Expected Shortfall
The average loss in the worst-case scenarios beyond VaR.
Monte Carlo Simulation
Generating thousands of possible future scenarios through random sampling.
DV01
Dollar change in value for a 1 basis point (0.01%) yield move.
CS01
Dollar change in value for a 1 basis point move in credit spread.
Macaulay Duration
The weighted average time (in years) to receive the bond's cash flows.