easy · Frm Part 2 Market Risk
A bank uses a 95% VaR model for its internal risk limits but is required by the regulator to backtest at 99%.
What is the main statistical reason for using the 95% level internally for validation?
- To decrease the probability of Type I errors (false alarms).
- To ensure that the actual P&L always exceeds the VaR.
- To increase the power of the backtest and reduce Type II errors.
- Because the 95% VaR is always a coherent risk measure.
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