Term
| What are 3 common deviations from normality that are problematic in modeling risk... |
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Definition
- Fat-tailed
- Skewed (risk managers especially concerned with negative (left) skews
- unstable (if parameters of the model are not constant, eg inflation, interest rates...) |
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Term
| Describe unconditional and conditional distributions: |
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Definition
Unconditional distributions - the mean and std dev are the ame for asset returns for any given day
conditional distributions - mean or variance of the return distribution may change over time |
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Term
| What is a regime switching volatility model: |
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Definition
| it assumes different market regimes exist with high or low volatility. Conditional distributions of returns are always normal with a constant mean, but either have a high or low volatility. |
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Term
| Historical based approaches for VAR fall into 3 sub categories, what are they? |
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Definition
- parametric: requires specific assumptions regarding the asset returns distribution. Delta-normal is an example of a parametric approach.
- nonparametric approach - less restrictive than parametric. No underlying assumptions of the assets returns distribution. Most common nonparametric approach models volatility using the historical simulation method.
- Hybrid approach - combines techniques of both parametric & non parametric. |
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