medium · FRM Part 2 Market Risk
An institutional risk team uses a non-parametric bootstrap to estimate a 95% confidence interval for their 99% VaR_1-day. The current 500-day historical window contains a maximum loss of 12.5 m.
If the true underlying risk regime has shifted such that the potential 99.9% tail loss is now25.0 m, what is the primary structural limitation of the bootstrap in this scenario?
- Bootstrapping is a parametric technique that assumes a normal distribution, failing to see the shift.
- The 500-day window is too large for bootstrapping, violating the Central Limit Theorem.
- The bootstrap is strictly bounded by the maximum observed loss in the historical sample.
- The bootstrap will overstate the confidence interval width due to the inclusion of the $12.5 m outlier.
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