My understanding of VaR model back testing is thus:
t: Calculate daily VaR using look back data over n past days
t+1: Compare daily return against VaR, record breach if one occurred, repeat
Apply conditional and unconditional tests to back test the VaR model.
My question is the danger of VaR look back periods overlapping.
In the above case adjacent VaRs use n-1 days of the same data; much reducing the independence of our back test sample.
I have read a few papers on VaR and none point to this issue - is it just me or is there nothing to worry about here?
Perhaps the conditional tests control for this somewhat, as they should spot clustering of breaches - but surely this would be less of an issue if the data used in the back tests are mutually exclusive.
(I have read previous questions posted and none directly asked this question, thought it was worth a shot!)