Explanation:
D is correct. VaR is traditionally calculated using data from the period immediately preceding the analysis. In stressed VaR, however, this data is gathered from a particularly stressful period in the past, which would not necessarily include the immediately preceding period.
A is incorrect. Stressed VaR produces a conditional loss distribution and is a conditional risk measure.
B is incorrect. Typically, the time horizon for stressed VaR is a short period (i.e., one to ten days).
C is incorrect. Stressed VaR is calculated from historical data, rather than assuming a probability distribution of losses.
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A financial institution is planning to add stressed VaR to the measures it uses to assess market risk. In preparation for this development, a risk analyst at the institution researches the differences between stressed VaR and traditional VaR, including the appropriate data, time horizons, and distributions. Which of the following is a major characteristic of stressed VaR that distinguishes it from traditional VaR?
A
Stressed VaR is based on an unconditional loss distribution rather than a conditional loss distribution.
B
Stressed VaR typically uses much longer time horizons, often several months or years.
C
Stressed VaR uses a different assumed probability distribution as an input compared to traditional VaR.
D
Stressed VaR is not necessarily based on data from the immediately preceding period, unlike traditional VaR.