hard · Frm Part 2 Market Risk
A risk manager is comparing 99% 1-day Historical Simulation (HS) VaR and parametric Normal VaR for a portfolio during a sudden regime shift from low to high volatility.
Which statement best characterizes the behavior of these estimators in the first few days of the new regime?
- Equal-weighted HS will significantly understate risk because the 1/n weighting assigned to new volatile observations is insufficient to move the quantile quickly.
- Parametric VaR using a long-run historical standard deviation will react faster than Volatility-Weighted HS (Hull-White).
- Parametric VaR using an EWMA volatility engine with a high decay factor λ will likely understate the risk more than basic equal-weighted HS.
- Bootstrapped HS VaR will provide a narrower confidence interval during the regime shift, making it more reliable than parametric models.
Sign up free to see the explanation and track your rank →
More Frm Part 2 Market Risk practice
- A leptokurtic distribution, often modeled by EVT, is characterized by which of the followi
- If a bank records 11 exceptions in a 250-day backtesting window for 99% VaR, what is the r
- In the GPD framework, if the threshold u is chosen too low, what is the most likely error
- In the Kupiec Likelihood Ratio test, what does the null hypothesis (H_0) state?
- The Hill estimator is primarily used to provide a direct estimate of which parameter?
- What happens to the mean of a GPD-distributed variable if the tail index ξ ≥ 1?
- What happens to the VaR estimate if we move from a thin-tailed (Gumbel, ξ = 0) model to a
- What is the base capital multiplier (m) applied to a bank's internal model market risk cap