Explanation:
One advantage of nonparametric VaR methods is that adjustments for skewness and fat tails are not needed. MDE is a version of nonparametric approaches that permits flexibility in weightings and the introduction of economic variable dependence. Nonparametric methods do not use data as efficiently as parametric methods. As such, they require much larger data sets. Using historical simulations, data sets can become fragmented and small.
(Book 4, Module 49.3, LO 49.e)
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Question 60
Which of the following statements regarding nonparametric versus parametric VaR methods is correct?
A
Nonparametric methods require adjustments for skewness and fat tails.
B
The multivariate density estimation (MDE) form of nonparametric methods allows for flexibility relative to economic conditions.
C
Nonparametric methods permit the use of very small sample sizes.
D
The nonparametric method naturally yields large data subsets when conducting historical simulations.
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