hard · FRM Part 2 Market Risk
A risk practitioner is comparing different refinements of Historical Simulation (HS) for a trading book.
Which of the following statements correctly identifies a structural property of Volatility-Weighted Historical Simulation (Hull-White) that distinguishes it from Age-Weighted Historical Simulation (Boudoukh-Richardson-Whitelaw)?
- It caps VaR procyclicality by applying a regulatory floor to the volatility scaling factor during stressed markets.
- It is the only HS refinement that can produce a V aR estimate exceeding the maximum raw loss observed in the historical window.
- It automatically captures non-linear tail dependence by fitting a t-copula to join the marginal return distributions together.
- It removes the 'ghost effect' by geometrically decaying the weight given to older observations as the sample window rolls forward.
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