David Lynch et.al., Validation of Risk Management Models for Financial Institutions Practice Question Set covers the following learning objectives:
Chapter 2. Validating Bank Holding Companies’ Value-at-Risk Models for Market Risk
Describe some important considerations for a bank in assessing the conceptual soundness of a VaR model during the validation process.
Explain how to conduct sensitivity analysis for a VaR model, and describe the potential benefits and challenges of performing such an analysis.
Describe the challenges a financial institution could face when calculating confidence intervals for VaR.
Discuss the challenges in benchmarking VaR models and various approaches proposed to overcome them.
Chapter 4. Beyond Exceedance-Based Backtesting of VaR Models
Identify the properties of an exceedance-based backtest that indicate a VaR model is accurate, and describe how these properties are reflected in a PIT-based backtest.
Explain how to derive probability integral transforms (PITs) in the context of validating a VaR model.
Describe how the shape of the distribution of PITs can be used as an indicator of the quality of a VaR model.
Describe backtesting using PITs, and compare the various goodness-of-fit tests that can be used to evaluate the distribution of PITs: the Kolmogorov-Smirnov test, the Anderson-Darling test, and the Cramér-von Mises test.