medium · FRM Part 2 Market Risk
In the context of backtesting a 99% VaR model over 250 days, a risk manager observes 6 exceptions. While the model passes the Kupiec Unconditional Coverage test (LR_uc), all exceptions occurred within two consecutive weeks.
Which test is most likely to reject this model and why?
- Christoffersen Independence test; it detects exception clustering.
- Kupiec POF test; it identifies too many total exceptions.
- Haas Magnitude test; it focuses on the size of the losses.
- Basel Traffic Light System; 6 exceptions automatically trigger a Red zone.
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