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A bank's model validation team is in the process of conducting a backtest of the institution's Value at Risk (VaR) model. As they prepare for the backtest, a team member expresses concern about the possibility of committing either a Type I error or a Type II error during the validation process. The team member then outlines the characteristics of these errors for the group. Can you explain the proper understanding of Type I and Type II errors in this context?
A
The probability of committing a Type ll error decreases when the sample size increases and the level of significance is held constant.
B
A backtest is considered statistically powerful if it minimizes the probability of committing a Type ll error regardless of the probability of committing a Type I error.
C
A Type I error is committed when an incorrectly specified model is accepted.
D
A Type ll error is committed when a correctly specified model is rejected.