By Kevin Dowd
This booklet presents an advent to worth in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring marketplace Risk (John Wiley & Sons 2002).
An creation to marketplace threat Measurement contains insurance of:
- Parametric and non-parametric threat estimation
- Numerical equipment
- Liquidity hazards
- Risk Decomposition and Budgeting
- Stress checking out
- Model threat
Read or Download An Introduction to Market Risk Measurement (The Wiley Finance Series) PDF
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Additional info for An Introduction to Market Risk Measurement (The Wiley Finance Series)
15)). 10 See note 1 above. 3 VaR Can Discourage Diversiﬁcation Another drawback is that VaR can discourage diversiﬁcation, and a nice example of this effect is provided by Eber et al. (1999). Suppose there are 100 possible future states of the world, each with the same probability. There are 100 different assets, each earning reasonable money in 99 states, but suffering a big loss in one state. Each of these assets loses in a different state, so we are certain that one of them will suffer a large loss.
2 What Exactly is VaR? The term VaR can be used in one of four different ways, depending on the particular context: 1. In its most literal sense, VaR refers to a particular amount of money, the maximum amount we are likely to lose over some period, at a speciﬁc conﬁdence level. 2. There is a VaR estimation procedure, a numerical, statistical or mathematical procedure to produce VaR ﬁgures. A VaR procedure is what produces VaR numbers. 3. We can also talk of a VaR methodology, a procedure or set of procedures that can be used to produce VaR ﬁgures, but can also be used to estimate other risks as well.
In this particular case, which is also typical of many, the surface rises with both conﬁdence level and holding period to culminate in a spike — indicating where our portfolio is most vulnerable — as both parameters approach their maximum values. 9 A VaR surface. Note: Produced using the ‘normalvarplot3D’ function. 7 Under the 1996 Amendment to the Basle Accord, institutions judged to have sound risk management practices are allowed the option of having their capital requirements determined by their own VaR estimates.