Explanation:
The methodology described relies on a combination of historical simulation (which is nonparametric as it uses actual historical returns to find a percentile) and exponential smoothing (often associated with parametric estimation, such as EWMA, to give more weight to recent data). This specific combination is known as the age-weighted historical simulation (or the Boudoukh, Richardson, and Whitelaw approach). Because it merges nonparametric and parametric features, it is classified as a Hybrid VaR estimating method.
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Q.90 An employee at a large Wall Street bank is estimating the 5% VaR of a specific asset by using historical simulations to estimate the percentile of returns and using exponentially declining weights on past data. This methodology is most likely an example of:
A
Parametric VaR estimating
B
Nonparametric VaR estimating
C
Implied Volatility VaR estimating
D
Hybrid VaR estimating