The International Bank has backtested its VAR models and has found four exceptions. Under the Basel Committee Penalty Zone rules, how would this be classified and what would be the associated VAR multiplier?
The Green Zone is for up to 4 exceptions, Yellow being 5 – 9, and Red 10 or more. Green has a multiplier of 3, Yellow ranges from 3.4 to 3.85, and Red is 4.
Remember the multiplier multiplies the VAR estimate to provide an increased degree of caution in the estimate. The more exceptions the greater the degree of caution needed with the VAR estimate because the model is less accurate.
