FRM Part II · FRM Exam Part II · Backtesting VaR
Which limitation of the Christoffersen independence test, as typically specified, is most accurate?
The standard Christoffersen independence test uses a first-order Markov setup, so it only detects dependence between exceptions on adjacent days. Patterns at longer lags can go undetected. It does not need normality and does not consider the size of losses beyond VaR.
- AIt only detects dependence between exceptions on consecutive days, so it can miss other patterns of dependenceCorrect
- BIt cannot be applied when the confidence level is 99%
- CIt requires returns to be normally distributed
- DIt measures the size of losses beyond VaR
Explanation
The standard test models exceptions as a first-order Markov sequence, comparing probabilities after an exception and after a non-exception. It can miss dependence at longer lags. It is distribution-free and ignores loss magnitude.
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