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 reduces V aR procyclicality by applying a floor to the volatility scaling factor during periods of market stress.
- 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 utilizing a t-copula to join marginal distributions.
- It eliminates the 'ghost effect' by decaying the importance of old observations geometrically over time.
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