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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 validation team runs a sensitivity analysis on its VaR model. A 99% one-day VaR is USD 10.0 million using a 250-day window. When the window is shortened to 60 days, VaR rises to USD 14.0 million; when it is lengthened to 500 days, VaR falls to USD 9.0 million. Which conclusion is best supported?

VaR is 40% higher with the 60-day window and 10% lower with the 500-day window, showing material sensitivity to the data window. The bank should justify its window choice. A lower longer-window VaR is not inherently wrong, and the largest figure is not automatically the best.

  1. AThe model is insensitive to the window, since all results are positive
  2. BThe model is quite sensitive to the data window, with VaR 40% higher for the short window and 10% lower for the long one, so the window choice needs justificationCorrect
  3. CThe model is wrong because the 500-day VaR is below the 250-day VaR
  4. DThe 60-day result should be adopted because it is the largest and so always conservative

Explanation

Short window: (14-10)/10 = 40% increase. Long window: (9-10)/10 = 10% decrease. A swing of this size shows material dependence on the window, which the bank should justify, for example by recent volatility regimes. A lower VaR with a longer window is not itself an error, and bigger is not automatically better.

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