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

Question

BlackTom AI · Accepted Answer

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

Option presented: It doesn't assume a normal distribution and captures actual historical tail events.

Analysis of this option: Historic Simulation uses empirical historical data to estimate risk metrics, meaning it bases its assessments on observed market moves rather than imposing a predefined distribution. This makes it capable of reflecting fat tails, skewness, and other features of the data that a normal distribution would understate or ignore. By contrast, approaches that rely on normality assumptions often underestimate extreme losses because the tails are lighter in a normal distribution than in many real-world financial time series.

Consideration of why this is advantageous: The key theoretical benefit is the avoidance of the normality assumption, which translates into a more accurate representation of tail risk and potential losses during extreme market events. Since risk metrics like Value at Risk (VaR) or expected shortfall depend heavily on tail behavior, capturing actual tail events improves the realism and usefulness of risk estimates in stress scenarios.

Potential misconceptions: If one thinks the advantage lies only in estimating typical day-to-day moves, that would miss the critical tail behavior Historic Simulation emphasizes. Additionally, an argument that this method ignores structural changes over time would be incorrect; while Historic Simulation is data-driven, it still relies on historical observations, and its quality depends on the relevance and length of the historical sample.

In summary, the core benefit highlighted by this option is the elimination of the normal distribution assumption and the explicit incorporation of observed tail behavior, which enhances the ability to assess risk during extreme market conditions.

BU.231.710.51.FA25 PoP Quiz - 1 (Week 4)

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

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?

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