We are doing a backtest of VaR model according to Basel II. Assume the bank’s 10-day 99% VaR is $1 million. The null hypothesis is: the VaR model is accurate. Out of 1,000 observations, 25 exceptions are observed (Binomial CDF )
　　A.     We will probably call the VaR model good but risk a Type I error.
　　B.     We will probably call the VaR model good but risk a Type II error.
　　C.     We will probably call the model bad but risk a Type I error.
　　D.     We will probably call the model bad but risk a Type II error.
　　Answer: C
　　The probability of 25 or more exceptions will only be observed 1 – 99.996%. So, we reject the model.
　　Null = good model. To decide the model is bad model is to reject null and this implies a risk of type I error.
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