Explanation:
The core assumption underlying any historical simulation approach, including the bootstrap historical simulation, is that the historical distribution of returns is a reliable proxy for the future distribution of returns. It implicitly assumes that the market conditions and the distribution of returns will remain stable (i.e., the same in the past and in the future) over the risk horizon.
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Q.26 A risk manager of a large bank wishes to incorporate the bootstrap historical simulation approach to estimate the market risk that a bank is exposed to by calculating the bank's VaR. What is the main reason for using historical returns to forecast VaR in the bootstrap historical simulation approach?
A
The distribution of returns is expected to change over time.
B
The distribution of returns will remain the same in the past and in the future.
C
The historical returns are always normally distributed.
D
The historical returns have no impact on future returns.
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