FRM Part II · FRM Exam Part II · Backtesting VaR
A risk manager backtests a 99% one-day VaR model over 250 days and records exceptions. She applies a test that checks both the number of exceptions and whether exceptions occur in clusters. Which description best matches the Christoffersen conditional coverage test?
The Christoffersen conditional coverage test combines the Kupiec unconditional coverage test, which checks the exception frequency, with the independence test, which checks for clustering. Its statistic is the sum of the two likelihood ratios, so a model can fail on either wrong frequency or dependent exceptions.
- AIt combines the unconditional coverage test and the independence test into one likelihood ratio statisticCorrect
- BIt tests only whether the exception count equals the expected count
- CIt tests only whether the VaR model has a normal distribution of returns
- DIt compares VaR forecasts with the profit and loss of hypothetical portfolios
Explanation
Conditional coverage is the sum of the unconditional coverage (Kupiec) likelihood ratio and the independence likelihood ratio. The first option alone would be Kupiec, which ignores clustering. The test does not check normality.
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