A way of estimating VaR by revaluing today's portfolio under past changes in market factors and reading the loss quantile. It assumes no distribution but treats the past window as the future.
Where you will meet it
Historical simulation comes up in 12 learning outcome notes across the FRM syllabus.
A few of them:
Sample Moments FRM Part I · Quantitative analysis
“This is how historical simulation estimates VaR.”
Calculating and Applying VaR FRM Part I · Valuation and risk models
“Historical simulation applies the risk-factor changes observed on each of the last N days, typically 500 to 1,000, to today's portfolio and revalues it to give N hypothetical profit and loss outcomes.”
Credit Value at Risk FRM Part II · Credit risk measurement and management
“Its P&L is roughly symmetric and is measured with historical simulation, variance-covariance or Monte Carlo on observed prices.”
Estimating Market Risk Measures: An Introduction and Overview FRM Part II · Market risk measurement and management
“Historical simulation (HS) estimates VaR without assuming any distribution.”
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