FRM part II- market Backtesting

anbu.edu
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FRM part II- market Backtesting

Postby anbu.edu » Thu Mar 06, 2014 12:01 pm

60.1 Basel’s traffic-light market risk backtest (green/yellow/red zones) is a test of the
NULL HYPOTHESIS that the bank’s internal 10-day 99% confident value at risk (VaR) model
is accurate. Which of the following is most difficult to quantify?
a) Probability of Type I error
b) Probability of Type II error
c) Probability of accepting an accurate VaR model
d) Significance level of backtest


The answer is B- thought i dont know the reason.. Can you please help me understand the answer

pradeeppdy
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FRM part II- market Backtesting

Postby pradeeppdy » Wed Mar 26, 2014 8:27 am

To give you a correct explanation we will take both errors.

Probability of type I error :- It is an incorrect rejection of true null hypothesis, If you have rejected the null hypothesis it means you are taking alternate is correct and you will move on with the wrong project. So you will find a type I error.

Probability of type II error :- This is difficult to quantify in this scenario because you are not working on the projections, Hence you are failing to reject the false null hypothesis.


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