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Market Risk [28]

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Bullet points include: Suppose we have the restriction alpha = 0.01. Test using likelihood ratio test, i.e. compare following test statistic to chi-squared 1(gamma), with, say, gamma = 0.95: Proposed by Kupiec and used by regulators when assessing accuracy of VaR models employed by banks. If VaR model incorrect then exceptions may not be independent. Would then need to include more general alternative, e.g. that probability of exception at time t depends on whether exception occurred at time t – 1

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