Simple Question. Can someone explain please: What is Estimation Risk in Value at Risk Backtesting
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Even in calculating VAR, you have certain assumptions / constants / random numbers being used. Hence, even your VAR calculation is not 100% correct. So, you are estimating VAR and you hedge similar portion of risk, however your Estimations aren't 100% correct. This is Estimation Risk.
Estimation risk is a generic term. It could be applied to models, VAR, and all other calculations. It highlights the actual vs estimated values differences and the risk associated with this difference.
