medium · FRM Part 1 Valuation and Risk Models
A risk manager is using the ' Cornish-Fisher Expansion'. Why is this adjustment necessary when calculating VaR?
- To account for the skewness and kurtosis of non-normal return distributions, which standard normal VaR understates.
- To rescale a 1-day VaR estimate into a 10-day VaR figure when volatility follows a mean-reverting process.
- To guarantee that the estimated correlation matrix stays positive semi-definite across all asset pairs used.
- To adjust the portfolio's reported VaR figure for the time-decay, or Theta, of the embedded option positions it holds.
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