FRM Part II · FRM Exam Part II · Backtesting VaR
A bank's 99% one-day VaR model produces 9 exceptions over 250 trading days. Review shows that on 6 of these days the trading desk had booked large intraday positions that were not included in the end-of-day position file used for the VaR calculation. Which cause of exceptions does this best illustrate?
The exceptions are best classified as position-related errors. Intraday positions were missing from the end-of-day file used to compute VaR, so the measured risk understated the actual risk taken. The problem lies in the input data and trading activity, not in the distributional assumptions or in chance.
- AIncorrect model assumptions about return distributions
- BPosition-related error from intraday trading not captured by the modelCorrect
- CPure bad luck from a correctly specified model
- DExcessive length of the historical data window
Explanation
The VaR was computed on positions that did not reflect the actual risk taken during the day, so the exceptions stem from the portfolio data and intraday trading, not the statistical model. Distribution or window issues would show up in the model's estimates, not in a mismatch between positions and the risk calculation.
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