Conclusion

This chapter has reviewed the backtesting process, giving practical details on how to
perform backtesting. The often difficult task of obtaining useful profit and loss figures
has been discussed in detail with suggestions on how to clean available P&L figures
for backtesting purposes. Regulatory requirements have been reviewed, with specific
discussion of the Basel Committee regulations, and the UK (FSA) and Swiss (EBK)
regulations. Examples were given of how backtesting graphs can be used to pinpoint
problems in P&L and risk calculation. The chapter concluded with a brief overview
of backtesting information available in the annual reports of some investment banks.