On the modeling assumptions of Historical Simulation for Value-at-Risk

Bj\"orn L\"ofdahl Grelsson

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Abstract: Historical Simulation (HS) and its extensions form a popular class of methods for estimating Value-at-Risk for portfolios of financial assets based on historical data. In this note, we seek to unify several ideas and models from throughout the literature into a single modeling framework. By explicitly defining a parametric model form for the asset returns and extracting the realized increments of the driving innovation process from historical data, we are able to reproduce the Historical Simulation, filtered Historical Simulation, and displaced Historical Simulation methods. This shows beyond a doubt that these methods need more underlying assumptions than what is often alluded to.

Date: 2026-05
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