medium · FRM Part 2 Market Risk
A risk manager is backtesting a 99% daily Value at Risk (VaR) model over a trailing 250-day window. The model records 3 exceptions.
If the manager decides to increase the significance level of the statistical test to reduce the probability of a false alarm (Type 1 error), what is the most likely consequence for the model's validation process?
- The statistical power of the test will increase significantly.
- The probability of a Type 2 error (accepting a flawed model) will increase.
- The expected number of exceptions (Tp) will shift from 2.5 to a higher value.
- The test becomes more likely to reject a model that is actually understating risk.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Market Risk practice
- Which of the following statements correctly identifies a structural deficiency of the Gaus
- If the shape parameter is ξ = 0.25, what is the tail index α?
- A leptokurtic distribution, often modeled by EVT, is characterized by which of the followi
- In the GPD framework, if the threshold u is chosen too low, what is the most likely error
- If a bank records 11 exceptions in a 250-day backtesting window for 99% VaR, what is the r
- A fund manager calculates the 'Marginal VaR' for an equity p… — What does this metric spec
- Which fixed-income mapping technique treats a bond portfolio as a single zero-coupon bond
- What happens to the mean of a GPD-distributed variable if the tail index ξ ≥ 1?