Which method can help mitigate the impact of intraday changes on Value at Risk (VaR)?

Mitigating the impact of intraday changes on Value at Risk (VaR) is crucial for capturing the volatility and risks that financial positions face within a single trading day. When backtesting with shorter time periods, such as the daily holding period, analysts can more accurately reflect and evaluate the potential daily losses that a portfolio could incur. This approach allows for a more responsive measurement of risk relative to the constantly changing market conditions throughout the day.

By focusing on shorter time frames, it becomes easier to detect anomalies or spikes in risk that could significantly affect the VaR calculation. Daily data captures price movements and market dynamics that longer time horizons might smooth over or overlook, providing a more realistic and timely assessment of risk exposure.

While employing longer time horizons could provide a broader view of risk over time, it may miss critical fluctuations that happen intraday. Higher capital reserves may provide a buffer against losses but do not directly address the measurement of risk itself, and increasing transaction types does not necessarily relate to the calculation of VaR or handle intraday changes effectively. Thus, backtesting with shorter time periods is more aligned with mitigating the specific risks posed by intraday market fluctuations.