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An insurance company is backtesting its VaR methodology using data from March 6, 2017 to March 31, 2017 (i.e., a total of 20 daily observations).
An insurance company is backtesting its VaR methodology using data from March 6, 2017 to March 31, 2017 (i.e., a total of 20 daily observations). Table 1 shows the daily equity returns of the insurance company and the estimated daily 5% VaRs over this period. (a) What is the hit sequence for this 20 observations? (5 points) (b) Calculate the likelihood ratio statistic for the unconditional coverage test. Would you reject the null hypothesis with 95% confidence? (Hint: The 95% quantile of 12 is 3.84 ) (7 points) (c) Calculate the likelihood ratio statistic for the independence test. Would you reject the null hypothesis with 95% confidence? (Hint: The 95% quantile of 12 is 3.84 ) (8 points)
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