Financial Risk Manager Part 1
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A risk analyst uses the bootstrap method to assess the market risk of a global equity portfolio that experienced significant volatility in the recent past. The analyst applies independent and identically distributed (IID) bootstrapping to the extracted standardized residuals of the fitted model, and these bootstrapped standardized residuals are then used to generate time paths of future asset returns. In the final step, the simulated data is used to estimate the VaR of the global equity portfolio over a 1-month horizon. Which of the following will the analyst find to be correct when applying the IID bootstrap method?
A
The VaR estimates will be reliable because they are based on random values generated from an assumed distribution that is not affected by external events or time.
B
The VaR estimates will be reliable because the IID bootstrap fully captures interdependencies in the observed asset return data.
C
The VaR estimates will not be reliable because the IID bootstrap allows the possibility of future losses that are larger than those that have been realized in the past.
D
The VaR estimates will not be reliable because they are derived from the most current observations of the period that is characterized by higher volatility.