medium · FRM Part 2 Market Risk
A risk practitioner is using the Cornish-Fisher expansion to estimate the 99% VaR.
If the portfolio exhibits significant negative skewness, how will the Cornish-Fisher VaR compare to the standard Normal VaR?
- The Cornish-Fisher VaR will be higher than the Normal VaR.
- They will be identical because the Cornish-Fisher expansion only adjusts for kurtosis.
- The VaR will decrease because negative skewness implies the distribution is bounded on the left.
- The Cornish-Fisher VaR will be lower because negative skewness reduces the volatility estimate.
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