# Backtesting Value at Risk (VaR)

In the previous articles we learned a lot about how VaR is calculated using various methodologies. We also learned about stress testing our portfolios. But can we really rely on these VaR methods and accept the results they throw at us? In other words, how accurate are these models in doing their job, and estimating the risk accurately.

This question can be answered by back testing a VaR model.  Back testing helps us test the accuracy of a VaR model. Under this technique, the losses forecasted using VaR are compared with the actual losses at the end of the time horizon. The time horizon could be anything such a 1-day, 10-days, 1-month or more.

VaR calculates losses with a certain confidence interval. Suppose we have a one-month VaR of $1million at a confidence interval of 99%. This means that there is a 1% chance of having losses that exceed$1million by the end of the month.