medium · FRM Part 2 Market Risk
The Cornish-Fisher expansion is used to adjust a VaR estimate for non-normality.
If a return distribution exhibits negative skewness and positive excess kurtosis, how will the adjusted VaR compare to the standard normal VaR?
- The direction of the change is ambiguous and depends entirely on the mean of the distribution.
- The VaR remains the same, as the expansion only affects the ES (Expected Shortfall).
- The adjusted VaR will be lower, as non-normality reduces the impact of tail events.
- The adjusted VaR will be higher than the normal VaR.
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