A newly appointed risk analyst at an investment bank is assisting in the backtesting of the institution's Value at Risk (VaR) model. Currently, the bank calculates its 1-day VaR at a 95% confidence level. However, in line with the Basel framework's recommendations, the bank is considering shifting to a 99% confidence level for the 1-day VaR estimation. Which of the following statements about this proposed adjustment is correct?

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The decision to accept or reject a VaR model based on backtesting results at the two-tailed 95% confidence level is less reliable using a 99% VaR model than using a 95% VaR model.

60.0%

The 95% VaR model is less likely to be rejected using backtesting than the 99% VaR model.

13.3%

When backtesting using a two-tailed 90% confidence level test, there is a smaller probability of incorrectly rejecting a 95% VaR model than a 99% VaR model.

20.0%

Using a 99% VaR model will lower the probability of committing both type 1 and type 2 errors.

6.7%

Financial Risk Manager Part 2

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