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FRM Part II · FRM Exam Part II · Validating Bank Holding Companies' Value-at-Risk Models for Market Risk

A bank's model validation team compares the daily VaR produced by its internal model with VaR calculated for the same portfolio using an independently built model, often by a vendor or another team. Which validation technique is being applied?

The technique is benchmarking. It compares the bank's VaR output with that of an independently built alternative model on the same portfolio, which differs from backtesting (comparison with realized P&L), stress testing (extreme scenarios) or sensitivity analysis (varying one input).

  1. ABenchmarkingCorrect
  2. BBacktesting against hypothetical P&L
  3. CStress testing
  4. DSensitivity analysis of a single risk factor

Explanation

Benchmarking compares the model's output with an alternative, independently developed model or measure for the same portfolio. Backtesting compares VaR with realized P&L outcomes, stress testing applies extreme scenarios, and sensitivity analysis varies one input at a time.

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