FRM Part II · FRM Exam Part II · Backtesting VaR
A validation team notes that a VaR model passes an unconditional coverage test with the right number of exceptions, yet nearly all exceptions occurred in one volatile two-week period. Which backtesting objective does this finding highlight?
The finding shows backtesting must also test independence of exceptions, not just their total count. Clustered exceptions suggest the model fails to adapt to changing volatility even if overall frequency is correct, which conditional coverage tests are designed to detect.
- ATesting that exceptions are independent over time, not only correct in total frequencyCorrect
- BConfirming that the confidence level is set at 99%
- CEnsuring the VaR horizon matches the holding period
- DReducing the total number of exceptions to zero
Explanation
Correct unconditional coverage only means the overall exception rate is right. Clustering of exceptions implies dependence, indicating the model reacts slowly to changing volatility. Independence tests (conditional coverage) address this. The other options are unrelated to clustering.
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