medium · Frm Part 2 Market Risk
An institutional desk uses a historical-simulation (HS) approach to estimate Value at Risk (VaR). They are debating between basic equal-weighted HS and the Hull-White volatility-weighted refinement.
Which of the following is a unique capability of the Hull-White approach relative to basic HS?
- It implicitly embeds tail dependence without requiring a correlation matrix.
- It can produce a VaR estimate that exceeds the maximum loss observed in the historical sample window.
- It eliminates the 'ghost effect' where old volatile data points drop out of the window.
- It ensures that the resulting VaR is always higher than the basic HS VaR in all market regimes.
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