Market Risk VaR: Model-Building Approach
4 important questions on Market Risk VaR: Model-Building Approach
Describe the model-building approach.
The MBA also known as the Var-Cov approach is an alternative to the HSA of market risk. This approach involves assuming a model for the joint distribution of changes in market variables. The model parameters are then estimated with actual data (with the typical assumption that changes are distributed according to a multivariate normal distribution, so that aslo the marginals are normal, which is a strong assumption).
Why is the historical simulation approach subjected to errors?
What is the purpose of adding weight to the historical simulation method?
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Why volatility scaling?
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