FRM Glossary · Part II · Market Risk

VaR Backtesting

Comparing the model's VaR forecast against actual P&L to verify the model's accuracy and detect model risk.

In more detail

The Basel Traffic-Light test (Kupiec) counts daily exceptions over 250 trading days. 0–4 exceptions = green, 5–9 = yellow, ≥10 = red. The Basel III internal-models-approach additionally tests ES via a likelihood-ratio backtest. Persistent green/yellow exceptions indicate mis-calibration and trigger model-review processes.