Skip to content

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

A validator wants to complement backtesting because VaR says nothing about the size of losses beyond the threshold. Which additional validation step best addresses this limitation?

The validator should review the size of exceptions and add stress testing and tail-focused analysis. VaR gives no information about losses beyond the threshold, so these complementary tools reveal tail severity that a simple exception-count backtest cannot capture.

  1. AExamine the magnitude of exceptions and use stress testing and tail-focused analysis alongside the VaR backtestCorrect
  2. BIncrease the holding period to one year to eliminate tail losses
  3. CRemove all exceptions that occurred in crisis periods from the sample
  4. DUse a lower confidence level so no losses exceed VaR

Explanation

VaR is silent on loss severity past the quantile. Reviewing how large the exceptions are, plus stress tests and tail analysis, covers that gap. Excluding crisis exceptions or changing the confidence level hides rather than addresses tail risk.

Did you get it right without looking?

One question tells you little. A timed set on Validating Bank Holding Companies' Value-at-Risk Models for Market Risk shows your real accuracy, how long you take and where you lose marks.

Practise Validating Bank Holding Companies' Value-at-Risk Models for Market RiskFree diagnostic mock

More Validating Bank Holding Companies' Value-at-Risk Models for Market Risk questions