Explanation:
The nonparametric approach is less restrictive than the parametric approach in that there are no underlying assumptions of the asset returns distribution. The most common nonparametric approach models volatility using the historical simulation method.
(Book 4, Module 49.2, LO 49.d)
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Question 60
Value at risk (VaR) is a probabilistic method of measuring the potential loss in portfolio value over a given time period and for a given distribution of historical returns. VaR is the dollar or percentage loss in asset value that will be equaled or exceeded only X percent of the time. Regarding the various approaches for estimating VaR, which of the following statements accurately describes a nonparametric approach? The nonparametric approach:
A
requires specific assumptions regarding the asset returns distribution.
B
requires no underlying assumptions of the asset returns distribution.
C
uses derivative pricing models, such as the Black-Scholes-Merton option pricing model.
D
combines various estimation techniques to estimate volatility using forecasted data.
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