medium · Frm Part 2 Market Risk
A risk practitioner is choosing between Age-Weighted (Boudoukh-Richardson-Whitelaw) and Volatility-Weighted (Hull-White) Historical Simulation.
What is the unique advantage of the Volatility-Weighted approach?
- It reduces the 'ghost effect' where a large loss stays in the VaR for exactly N days.
- It can produce VaR estimates that are larger than any loss observed in the historical window.
- It ensures that older data is given more weight than recent data.
- It eliminates the need for any assumptions about the underlying distribution.
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