What is an advantage of historical VAR?

Choosing the option that states historical VAR is non-parametric highlights an essential advantage of this approach in risk management. Historical Value at Risk (VAR) directly utilizes actual historical market data to estimate potential losses over a specified time frame at a given confidence level. This methodology does not assume any parametric form of the return distribution, making it particularly useful in unpredictable or nonlinear markets where normal distribution assumptions may not hold.

The non-parametric nature of historical VAR allows for the inclusion of extreme market events, as the actual past performance reflects real market behaviors without forcing the returns into a predetermined statistical model. This can lead to more accurate risk assessments, as historical VAR captures the range of the observed market movements and their associated risks more effectively than parametric methods.

In comparison, the other options refer to aspects that do not align with the advantages of historical VAR. Assumed market conditions and theoretical distributions imply a level of abstraction and inference that does not fit within the framework of historical VAR, which is grounded in empirical data. Additionally, while historical VAR can give insights into potential market conditions based on past data, it does not directly estimate future market variances, which are more appropriately derived through alternative methods such as GARCH models or Monte Carlo simulations. Thus, the selection of