FRM Part II · FRM Exam Part II · Backtesting VaR
A risk manager backtests a 99% one-day VaR model over 250 trading days. Under the Kupiec unconditional coverage test, the null hypothesis is that:
The Kupiec test's null hypothesis is that the true exception probability equals the one implied by the confidence level, here 1%. It tests the frequency of exceptions only (unconditional coverage), not whether exceptions cluster over time.
- AExceptions are independent over time
- BThe true exception probability equals 1%Correct
- CThe VaR model has no exceptions in the sample
- DThe expected loss on exception days equals VaR
Explanation
The Kupiec proportion-of-failures test checks whether the observed exception frequency is consistent with the model's stated probability (1% for 99% VaR). Independence of exceptions is tested by conditional coverage/independence tests, not by Kupiec alone.
Did you get it right without looking?
One question tells you little. A timed set on Backtesting VaR shows your real accuracy, how long you take and where you lose marks.
More Backtesting VaR questions
- A risk manager backtests a 99% one-day VaR model over 250 days and wants to test both the correct number of exceptions and whether exception…
- A bank backtests its 95% one-day VaR over 500 days and records 35 exceptions. Using the normal approximation to the binomial, what is the z-…
- Which limitation of the Christoffersen independence test, as typically specified, is most accurate?
- A bank's 99% one-day VaR model has 8 exceptions over 250 days in the yellow zone. Investigation shows 3 of them occurred because traders' po…
- A bank backtests its 99% one-day VaR over 500 days using hypothetical (clean) P&L, where positions are held fixed, and separately using actu…
- Over a backtest, a model produced 100 days after a non-exception day, of which 4 were exceptions, and 20 days after an exception day, of whi…