Question: The basic historical simulation approach assumes that each day in the past is given equal weight. More formally, if we have observations for n day-to-day

The basic historical simulation approach assumes that each day in the past is given equal weight. More formally, if we have observations for n day-to-day changes, each of them is given a weighting of 1/n. However, it is possible to adjust the basic historical simulation approach for nonstationarity in market variables, and allocate more weights to more recent observations.

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