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 standard deviation reacts more slowly than Volatility-Weighted HS (Hull-White), which rescales all past return data.
- Parametric VaR built on an EWMA engine with a high decay factor lambda will likely understate true portfolio risk less severely than basic equal-weighted HS.
- Bootstrapped HS VaR actually produces wider, not narrower, confidence intervals during a sudden regime shift, reflecting greater estimation uncertainty in the sample.
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