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

A validation team at a bank holding company reviews its VaR model. Which of the following activities is an example of outcomes analysis rather than evaluation of conceptual soundness or ongoing process verification?

Comparing daily VaR estimates with realised profit and loss and counting exceptions is outcomes analysis, which is backtesting. Reviewing assumptions tests conceptual soundness, while checking data feeds and change controls are process verification and governance activities, not comparisons of output against outcomes.

  1. AReviewing developer documentation of the model's assumptions about return distributions
  2. BComparing daily VaR estimates with realised trading profit and loss and counting exceptionsCorrect
  3. CChecking that position data feeds into the model are complete and timely
  4. DConfirming that model change procedures require approval from the governance committee

Explanation

Outcomes analysis compares model output with actual results, as backtesting does. Documentation review is conceptual soundness, while data-feed checks and change controls are process verification and governance. The key distractor, data feed checks, tests inputs, not outputs versus outcomes.

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