Coupon Accepted Successfully!


Historical Simulation

  • No assumptions is required about the distribution of returns.
  • VaR is estimated directly from the past data which includes all the correlations among
  • historical data.
  • Historical data has fat tails and skewness already accommodated in itself.
  • The most important parameter in historical simulation is the Look back window.
  • For example, in 250 observations window the 5th percentile is between 12th and 13th observation.
  • Historical Simulation method is not exposed to any model risk.
  • The biggest drawback with the Historical Simulation method is that the changes in volatility and correlation from structural changes are not recognized.
  • We have an asset with ordered simulated price returns as below for sample of 100 days and is trading at 100. What is the VaR at 99% confidence if the returns for the last 100 days are:
  • -7.5%, -6.7%,-6.6%, -6.51%,-.6.12%,-5.92% … 4.34%, 4.5%,5.1%, 5.2%,5.3%


Test Your Skills Now!
Take a Quiz now
Reviewer Name