Back testing
Chapter 3 - Cotton marketing - Risk management – A cotton
supply chain manager’s perspective
Back testing is revalidating the efficacy of the business’s VaR framework. This is done by verifying that actual price movements are within the probabilistic price movement calculated by the VaR model of the company.
Back testing provides a statistical measure for ascertaining whether the VaR model used by the company is suitable for its operations. It can highlight products where the actual price movement is higher than the price movement calculated by the VaR model.