If I find an indicator (e.g. an earthquake happening) that is almost always followed by a VaR breach the next day. That means the probability of breach conditional on the indicator is too
(high/low). I should adjust the VaR
(higher/lower) the next time I see the indicator.

Question

If I find an indicator (e.g. an earthquake happening) that is almost always followed by a VaR breach the next day. That means the probability of breach conditional on the indicator is too 
 (high/low). I should adjust the VaR 
 (higher/lower) the next time I see the indicator.

BlackTom AI · Accepted Answer

In this scenario, you observe a link between an indicator (like an earthquake event) and a subsequent Value-at-Risk (VaR) breach the next day. If this indicator is almost always followed by a VaR breach, the conditional probability of a breach given the indicator P(breach | indicator) is too high relative to the VaR target. Therefore, the first blank should be filled with 'high' to reflect that the probability is elevated.

Next, because the indicator tends to precede breaches, the estimated risk that the VaR threshold will be breached on a future instance conditioned on seeing the indicator is also elevated. To be more conservative and to maintain the stated confidence level for VaR, you would increase the VaR for the next period when you observe the indicator. Thus the second blank should be filled with 'higher' to indicate raising the VaR level.

To make this concrete, consider the logic of risk controls: if the event signal suggests more frequent or larger losses than the current VaR accounts for, you must adjust the risk guardrails upward. Conversely, if the indicator were rarely followed by breaches (low P(breach | indicator)), you would lower the VaR or refrain from increasing it. This helps avoid systematically underestimating risk when the signal is predictive, and avoids overreacting when it is not.

In summary, the intuitive reading is that the probability is high, and the VaR should be higher the next time the indicator is seen, to preserve the integrity of the risk measure and maintain the desired safety margin.

BU.230.730.53.SP25 Final Exam- Requires Respondus LockDown Browser

If I find an indicator (e.g. an earthquake happening) that is almost always followed by a VaR breach the next day. That means the probability of breach conditional on the indicator is too (high/low). I should adjust the VaR (higher/lower) the next time I see the indicator.

查看解析

登录即可查看完整答案

类似问题

A portfolio has an expected annual return of 10% and a standard deviation of 16.75%. What is the 1% (analytical) VAR of $100,000 in this portfolio?

When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the ____

A portfolio has an expected annual return of 10% and a standard deviation of 16.75%. What is the 1% (analytical) VAR of $100,000 in this portfolio?

When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the ____

Value at Risk (VaR) at a 95% confidence level for a one-day horizon of $2 million means:

What is the theoretical relationship between N-day VaR and 1-day VaR under the square root of time rule?

In the RiskMetrics framework, what does DEAR (Daily Earnings at Risk) fundamentally measure?

What is the main theoretical advantage of Historic Simulation over the RiskMetrics approach?

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单