medium · FRM Part 2 Market Risk
In a 99% VaR backtest over 250 days, the expected number of exceptions is 2.5.
If a model is rejected because it produces 0 exceptions, what is the rationale for this being considered a potential error?
- It is a violation of the subadditivity property required of a coherent VaR measure.
- It is a Type II error because the model is failing to identify any actual losses at all.
- Zero exceptions automatically trigger placement of the model in the Basel Red Zone.
- It may be a Type I error if the model is correct but simply experienced a lucky period.
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