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FRM Part II · FRM Exam Part II · Non-parametric Approaches

A bank switches from equally weighted historical simulation to the age-weighted (BRW) approach with decay factor lambda = 0.98. Compared with the equally weighted approach, which outcome is most likely immediately after a sudden jump in market volatility?

VaR rises faster. The age-weighted approach gives recent observations larger weights than older ones, so large losses from a sudden volatility jump move the weighted quantile more quickly than under equal weighting. Weights still sum to one, so VaR remains well defined.

  1. AVaR rises faster because recent large losses receive greater weightCorrect
  2. BVaR rises more slowly because older observations are given greater weight
  3. CVaR is unchanged because weights do not affect quantiles
  4. DVaR becomes undefined because weights no longer sum to one

Explanation

Age weighting gives more weight to recent observations, so new large losses move the weighted quantile more quickly. Weights are normalized to sum to one, so VaR remains defined. The weights do affect the quantile.

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