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Answer: The historical distribution has fatter tails than a normal distribution.
**Explanation:** - For a normal distribution, the 95% VaR corresponds to 1.645 standard deviations from the mean - The given VaR of 1.56 is less than the normal distribution's 1.645 - This means the historical distribution has more extreme values in the tails than a normal distribution - When the empirical VaR is smaller than the theoretical normal VaR, it indicates fatter tails (more extreme observations) - Therefore, the historical distribution has fatter tails than a normal distribution
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The VaR at a 95% confidence level is estimated to be 1.56 from historical simulation of 1,000 observations. Which of the following statements is most likely true?
A
The parametric assumption of normal returns is correct
B
The parametric assumption of lognormal returns is correct
C
The historical distribution has fatter tails than a normal distribution.
D
The historical distribution has thinner tails than a normal distribution.
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