Skip to content

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

A risk manager is choosing between a 250-day and a 1,000-day window for basic historical simulation VaR on an equity portfolio. Which statement best describes the trade-off?

A longer window supplies more tail observations and so a statistically more precise VaR, but it reacts slowly to changing market conditions because old data keeps equal weight. A shorter window is more responsive but noisier and more prone to ghost effects.

  1. AA longer window gives more observations in the tail and a more precise estimate, but responds more slowly to changes in current market conditionsCorrect
  2. BA longer window always produces higher VaR because it includes more extreme events
  3. CA shorter window reduces the ghost effect because it assigns decaying weights to old data
  4. DA shorter window gives more precise tail estimates because recent data is more relevant

Explanation

A longer window gives more tail observations and reduces sampling error but makes VaR slow to adapt to changed volatility regimes and relevant data may be diluted. Longer windows do not always produce higher VaR, and a shorter window does not decay weights; it increases sampling noise and the ghost effect is typically larger.

Did you get it right without looking?

One question tells you little. A timed set on Non-parametric Approaches shows your real accuracy, how long you take and where you lose marks.

Practise Non-parametric ApproachesFree diagnostic mock

More Non-parametric Approaches questions