Pitfalls and solutions in current risk management methodology

Cristina Danciulescu

Abstract

ABSTRACT

The test's asymptotic theory is based on the normal distribution approximation to a binomial distribution (distribution of hits). The paper shows, contrary to what was believed by practitioners, that simple solutions such as increasing the risk level, sample size or both may not solve the problem. We argue that the best alternative is relying on the "exact test", ie, the binomial test.