Validating Bank VaR Models — Beyond Backtesting
Free GARP FRM Part II lesson in Market Risk Measurement and Management. 20 min read, ~2,991 words.
Exception-count backtesting (Kupiec) is necessary but not sufficient; full validation rests on three pillars: conceptual soundness, sensitivity analysis, and distribution-based backtesting. Conceptual soundness review asks whether the model's design assumptions match the portfolio's economics, independent of historical performance. Sensitivity analysis perturbs vol, correlation, distribution, window, and method. Stable models are...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
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