FRM Part II · FRM Exam Part II · Backtesting VaR
After a backtest, a bank classifies exceptions into those caused by a correct model experiencing an unusual event, and those caused by model weakness. Which finding would most clearly indicate a model integrity problem, rather than bad luck?
Exceptions concentrated in one asset class and traced to a missing risk factor in the mapping indicate a systematic model integrity problem. The other findings involve counts within the expected range or isolated shocks, which are consistent with a correct model experiencing bad luck.
- AA single exception on a day of an unprecedented market shock with a count within the expected range
- BExceptions that occur mostly on days when a particular asset class is traded, because its risk factor mapping omits a key factorCorrect
- CA count of 3 exceptions in 250 days at 99% confidence
- DAn exception following an overnight geopolitical announcement, with a total count in the green zone
Explanation
Exceptions concentrated in one asset class and traceable to a missing risk factor in the mapping point to a systematic model deficiency. The other options describe counts or events consistent with a correct model, so they suggest chance. Targeted fixes include adding the factor or improving the mapping.
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