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##### New Member

I am now thoroughly confused by the Square Root Rule and scaling the VaR under the circumstance of Mean Reversion and Auto correlation. In search of an explanation, I found this thread http://forum.bionicturtle.com/newreply/1729/ ,

but your link is not attached anymore.

The rules for when there is mean reversion of asset returns, or mean reversion of the variance are really confusing me. I don't know how to apply either of the rules, nor when scaling up or down for either example of mean reversion. Do you have an updated thread that illustrates both cases (asset returns, and return volatility) of mean reversion, whether scaling up or down??

I have searched the internet, your notes, and even the 5th edition of the handbook for an outline or a simple explanation to help with the exam questions on this subject (& in genera). While I can recite your chart (if there is mean reversion, the SRR rule overstates the LR vol...", I still am confused! I have killed a ton of time on this, and thought I understood several times. I think that there are a few key things that I am missing to make the chart or rules make sense.

For example, does the chart assume that you are starting with the daily volatility, and if you apply the SRR by scaling it to a 1 year vol,….it overstates the long run vol? And does “overstate” this mean that it is actually too high? It is the scaled measure that is overstated right? (not the LR vol??)

Also, there is a question about calculating the one week VaR and rescaling it to a 1 day VaR, assuming that there is mean reversion. The answer is that the recalculated VaR will be less than the ORIGINAL VaR. Since the question is relative to the original VaR (not the LR), does your chart apply in this question? Is the answer different if we started with the 1 week VaR, and recalculated and scaled to a 1 day VaR, with mean reversion?

Does autocorrelation take everything in the opposite direction?

Please help! I would imagine that there may be other students who are as confused. This will be my last annoying question before the exam, I promise! And, it’s important to say that your material has really helped me to understand the material significantly. I took a course prior to the exam last November, and thought that I knew the material. I was blown away on exam day. Once I started reading your notes and material, I realized that at best, the course that I took, introduced the concepts. I am hoping to pass this time around in 2 weeks. BTW, I am not a risk management practitioner. Thanks again for your help!

Theresa