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Explanation:
Under the age-weighted historical simulation approach, past returns are assigned weights that decline exponentially. A decay parameter (typically denoted by , where $0 < \lambda < 1$) is used to give more recent observations greater weights, while distant observations receive progressively smaller weights. This allows the VaR estimation to quickly reflect recent market conditions and trends rather than equally relying on older, potentially irrelevant data.
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Q.3012 Simon is using the age-weighted historical simulation approach to estimate the VaR of a stock portfolio. Under age-weighted historical simulation,
A
more recent observations are weighted more and distant observations weighted less.
B
all observations are weighted equally.
C
the decay parameter takes a value of 1.
D
the historical window of observations must not exceed 250 days.