medium · FRM Part 1
A portfolio has a 1-day 99% HS VaR of $500,000. The risk manager discovers that the historical data for one asset was accidentally 'filled' with zeros for a month where it actually had high volatility.
What is the effect on the VaR estimate?
- The VaR will be unaffected because HS only looks at the mean return.
- The VaR will be overstated because the model assumes zero volatility is a sign of extreme risk.
- The VaR will likely be understated because extreme potential losses were replaced with zero-change outcomes.
- The model will automatically detect the error and use the Parametric VaR as a fallback.
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