Backtesting KPI’s

Taking Basel zone definitions, we extend this framework to backtesting results over different time horizons (1 year (250 days) and 3 years (750 days)) and different confidence levels (99.5%, 99% and 95%)).

The points where the yellow and red zones start are calculated according to the methodology described above, with n=250 for 1 year time horizon and n=750 for 3 years’ time horizon and p_0=0.01 for 99% confidence level model, p_0=0.005 for 99.5% confidence level model and p_0=0.05 for 95% confidence level model.

For instance, when n=750 and p_0=0.005, so time horizon is 3 years and confidence level is 99.5%, the yellow zone starts at 7 exceptions and the red zone starts at 13 exceptions.

All the calculations, including probabilities of type 1 error are shown in the attached spreadsheet. Here we show the snapshots of each calculation.

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