Explanation:
A stress period typically includes extreme market events with higher volatility and significant tail risks. This increased variability in returns leads to wider confidence intervals for VaR estimates, as the uncertainty around the estimate is amplified due to the pronounced market movements.
A is incorrect: Longer periods generally include more data points, which reduce sampling variability and narrow confidence intervals. The effect of a longer historical period is opposite to that of a stress period, where fewer extreme events dominate the dataset.
B is incorrect: The stress period has higher volatility and tail risks, increasing the uncertainty and widening confidence intervals. Narrower confidence intervals are expected in periods with lower variability, not during stress periods.
D is incorrect: A longer historical period reduces sampling variability by including more data points, typically resulting in narrower confidence intervals. This distractor is plausible because candidates might mistakenly associate shorter periods with less uncertainty.
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Q.6470 A risk analyst is comparing confidence intervals for VaR estimates calculated using different methods with historical simulation VaR. They are using both order statistics and bootstrapping techniques. According to empirical studies, which of the following statements BEST describes the relative performance of order statistics and bootstrapping in producing confidence intervals for historical simulation VaR?
A
Order statistics consistently produces significantly tighter confidence intervals than bootstrapping.
B
Bootstrapping consistently produces significantly tighter confidence intervals than order statistics.
C
There is no consistent evidence that either method produces tighter confidence intervals on a consistent basis.
D
Bootstrapping is only applicable to parametric VaR methods, not historical simulation.