Brandeis FIN 285a - Computer Simulations and Risk Assessment Section 4.2 (25 pages)

Previewing pages 1, 2, 24, 25 of 25 page document View the full content.
View Full Document

Computer Simulations and Risk Assessment Section 4.2



Previewing pages 1, 2, 24, 25 of actual document.

View the full content.
View Full Document
View Full Document

Computer Simulations and Risk Assessment Section 4.2

78 views

Other


Pages:
25
School:
Brandeis University
Course:
Fin 285a - Financial Economics

Unformatted text preview:

Fin285a Computer Simulations and Risk Assessment Section 4 2 VaR Issues Dan elson 4 4 Overview Just a quantile Violates technical risk properties Can VaR be manipulated Fall 2014 LeBaron Fin285a 4 2 2 23 Just a quantile Violates technical risk properties Can VaR be manipulated Just a quantile Fall 2014 LeBaron Fin285a 4 2 3 23 VaR is just a quantile VaR marks quantile point on the distribution Does not tell you about left tail beyond VaR Might ignore a lot of risk Might be sensitive to probability level Fall 2014 LeBaron Fin285a 4 2 4 23 VaR ignores left tail 10000 9000 Frequency out of 100 000 8000 7000 6000 5000 4000 3000 2000 0 1 1000 0 Fall 2014 LeBaron 2 1 5 1 0 5 Profit loss 0 0 5 1 Fin285a 4 2 5 23 VaR Paradox Danielson page 80 Two portfolios X straight equity position Y is hedged with a put option which puts a floor on the losses Ignore the cost of this option Also assume the floor is below the VaR p quantile cutoff Result VaR is the same in both cases but risk is quite different see next figure See Danielson page 80 for another example Fall 2014 LeBaron Fin285a 4 2 6 23 VaR quantile confusion 4 x 10 4 3 2 1 83 6 0 60 80 100 120 140 100 120 140 4 x 10 4 3 2 1 0 Fall 2014 LeBaron 83 6 60 80 Fin285a 4 2 7 23 Just a quantile Violates technical risk properties Can VaR be manipulated Violates technical risk properties Fall 2014 LeBaron Fin285a 4 2 8 23 Properties of a coherent risk measure Let h X be a quantitative measure of risk 1 Monotonic Xi Yi h X h Y 2 Homogeneous h cX ch X 3 Translation invariance h X c h X c 4 Subadditivity h X Y h X h Y Fall 2014 LeBaron Fin285a 4 2 9 23 Quick info bonds and VaR Bond 1 year maturity Principal Interest No 100 5 default pays 105 Price 100 Default probability 0 0125 If there is a default bond returns 0 100 uniform recovery Fall 2014 LeBaron Fin285a 4 2 10 23 Quick info bonds and VaR 4 2 x 10 1 0 0 20 40 60 80 100 20 40 60 Recovery value 80 100 4 PDF 2 x 10 1 0 0 100 1 25 10 4 0 0125 Fall 2014 LeBaron 80 1 25 10 4 0 01



View Full Document

Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Computer Simulations and Risk Assessment Section 4.2 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Computer Simulations and Risk Assessment Section 4.2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?