Handling Contract Maturities in Historical VaR Backtests

Summary

The document raises a practical question about backtesting value-at-risk models for portfolios containing instruments with maturities or payment schedules. It asks whether historical contract terms should be shifted backward along with each test date so that the simulated portfolio keeps a constant time to maturity. The author notes that this approach appears in existing code but says they have not found it discussed in the literature.

No procedure, reference, test, or VaR result is provided, so the document does not resolve whether rolling schedules is appropriate. The issue highlights a modeling choice that can affect historical portfolio valuation: keeping maturity constant may represent a hypothetical constant-maturity position, while retaining actual contract dates may represent the positions that existed at each historical date. Which setup is suitable depends on the backtest objective and how historical holdings are defined. The question is limited to raising that distinction rather than recommending a convention.

Key ideas

• VaR backtests for bonds and derivatives must specify how historical maturities and schedules are treated.
• Rolling contract dates backward can preserve a constant time to maturity.
• That choice may describe a hypothetical constant-maturity portfolio rather than historically held contracts.
• The document supplies no evidence or reference establishing a standard procedure.

Tags

# Do you roll back the maturities and schedules when backtesting VaR for portfolios of bonds, options or future contracts?


# Do you roll back the maturities and schedules when backtesting VaR for portfolios of bonds, options or future contracts?












I want to backtest VaR models which are applied to portfolios of products which have maturities (options and futures) and even schedules (bonds). I have a question which never came up when backtesting VaR models for equity portfolios: is it adequate to roll the contract schedules/maturities backwards as I move backwards in time, in order to keep the maturity constant on each backtest date?

I have seen this implemented in someone else's code, but I have not seen it discussed in the literature and I don't know if it is standard practice. I would love it if anyone could share a reference which discusses the actual procedure to obtain VaR result on a backtest date in practice for non-equity portfolios.

Thank you!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.