Historical Simulation Method

The Historical Simulation Method is a non-parametric approach to calculating risk by using past market data to predict future performance. It assumes that the distribution of future returns will be similar to the distribution of returns observed in the past.

To calculate risk, the portfolio is revalued using historical price changes over a specific look-back period. This method is popular because it does not require assumptions about the underlying distribution of asset returns, such as normality.

However, it is limited by the fact that it cannot account for market events that have not occurred within the chosen historical window. In the fast-evolving cryptocurrency market, historical data may be less predictive of future regimes compared to traditional markets.

It remains a straightforward way to quantify risk based on observed market behavior.