THE HYBRID APPROACH FOR ESTIMATING VAR IS THE COMBINATION OF A PAR...

10.

The hybrid approach for estimating VaR is the combination of a parametric and a nonparametric approach. It

specifically combines the historical simulation approach with:

a.

The delta normal approach.

b.

The exponentially weighted moving average approach.

c.

The multivariate density estimation approach.

d.

The generalized autoregressive conditional heteroskedasticity approach.

Correct Answer: b

Rationale:

The hybrid approach combines two approaches to estimating VaR, the historical simulation and the

exponential smoothing approach (i.e. an EWMA approach). Similar to a historical simulation approach, the hybrid

approach estimates the percentiles of the return directly, but it also uses exponentially declining weights on past

data similar to the exponentially weighted moving average approach.

Section:

Valuation and Risk Models

Reference:

Linda Allen, Jacob Boudoukh and Anthony Saunders, Understanding Market, Credit and Operational

Risk: The Value at Risk Approach, Chapter 2, “Quantifying Volatility in VaR Models.”

Learning Objective:

Compare and contrast different parametric and non-parametric approaches for estimating

conditional volatility.

2015 Financial Risk Manager (FRM®) Practice Exam