Back Testing

[ckyeh]

Dear David:

On your webnair 「2010-7-d-Operational」, page 31:
Back testing Yellow: 5~9 k +

「K 」 means specific risk 「k specific rsik」?
If so, it conflicts with Handbook, page 709:
The Basel Committee has decided that up to four exceptions is acceptable, which
defines a “green” light zone. If the number of exceptions is five or more, the bank
falls into a “yellow” or “red” zone and incurs a progressive penalty where the
multiplicative factor, k, is increased from 3 to 4.

Handbook multiplicative factor k reflects both the multiplicative and the plus factors, not SRC(specific risk charge, page 703).

Please help me straight it out.
Thanks

 

[David Harper CFA FRM]

Hi ckyeh,

My graphic does not match, apologies: the formula and text are correct:
K (market risk) = max [VaR(t-1), F*60-day average VaR] + k(specific risk),
Where F >= 3.0 but scales up from 3.0 to 4.0 per the backtest
… my graphic should have been updated to say, in this case, F + 0.4 to 1.0

Then, it is the same as the handbook only they have used SRC(t) for the specific risk and (k) for the multiplicative factor. So the handbook is correct.

Correct is:
MAX [ VaR(t-1), Multiplicative Factor 3.0 (up to 4.0) * 60-day average] + specific risk charge

Thanks, David