The role of backtesting of VaR models in portfolio management

  QUESTION Discuss, in approximately 1200 words, the role of backtesting of VaR models in portfolio management, and the associated limitations of VaR models. A useful reference for backtesting is Lucas, A., (2001), “Evaluating the Basle Guidelines for Backtesting Banks’ Internal Risk Management Models,” Journal of Money, Credit and Banking, Vol. 33, No. 3. In particular, one should read p826-831 and the concluding remarks.