Market Risk VaR: Historical SImulation Approach
6 important questions on Market Risk VaR: Historical SImulation Approach
How many days of data are used in the historical simulation approach and why?
In the historical simulation approach 501 days of data are used, in order to generate 500 different scenarios of variation between 'today' and ' tomorrow'.
In the HSA how do we compute tomorrows value from the computed scenarios?
vi = value of a market variable on day i.
today is day n.
vn+1 = vn * vi/vi-1
When we don't have a sufficient number of observations, what are two solutions?
- Under the HSA we can bootstrap (or jackknife) the available data (to create a larger sample).
- We can use the model-building approach (MBA).
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When is VaR easie to calculate?
When can we multiply the VaR with the Square root of the time horizon?
Where should the time horizon depend on?
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