Explanation:
Historical simulation approaches, including bootstrap historical simulation, rely on the fundamental assumption that the historical distribution of returns is a good proxy for the future distribution of returns. Therefore, it assumes that the distribution of returns will remain relatively stable over time.
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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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