What is Historical Simulation?
Like Monte Carlo, it is a simulation technique, but it skips the step of making assumptions about the distribution of changes in market prices and rates (usually). Instead, it assumes that whatever the realizations of those changes in prices and rates were in the past is what they can be over the forecast horizon. It takes those actual changes, applies them to the current set of rates, then uses those to revalue the portfolio. When done, you’ve got a set of portfolio revaluations corresponding to the set of possible realizations of rates. From that distribution you take the 99th percentile loss as the VaR.
