Historical VaR
FinPricing offers:
Four user interfaces:
- Data API.
- Excel Add-ins.
- Model Analytic API.
- GUI APP.
Historical VaR Introduction
Value at Risk (VaR) is the regulatory measurement for assessing market risk. It measures the future extreme loss of a portfolio caused by the underling market rate change over the risk horizon. Usually, it reports 1%-tail of profit and loss (P&L) distribution (99%-VaR) over a 10-day holding period. In addition, regulatory also recommends to compute a 97.5% Expected Shortfall (ES)
The Historical VaR uses the history of market rates and prices to build the empirical P&L distribution for the trading book portfolio. One-year or two-year history is commonly used.
The market risk factors denote the market rates and prices that affect the value of the institution's trading positions. In general, the market risk factors include liquid and fundamental market rates and prices. If the historical shocks of market rates and prices are not available, the proxy market risk factors are transformed to the corresponding shocks of the market rates and prices through the proxy rules.
The historical simulation can be computed by using the time series of the underlying market securities or using the time series of the built-in curves such as interest rate and credit curves. These can produce slightly different historical simulation P&Ls.
In the second case, one needs to convert the historical shocks from the built-in curves into the historical shocks of the underlying market securities. Consequently, VaR is calculated by using the historical shocks from the built-in curves rather than those from the underlying market securities.
The historical simulation is constructed by shocking market risk factors. The interest rate risk factors consist of base zero rate curves, basis zero rate curves, government yield curves, inflation curves, swaption volatility, and cap volaitlity.
FX risk factors include FX spot rates, FX forward rates, FX zero rate curves, FX volaitlity, and cross-currency basis curves.
Equity risk factors contain equity prices, equity index prices, dividends, repo curves and volatility.
Commodity risk factors are commondity prices, futures price curves, forward curves, convenience yields and volaitlity.
The historical VaR can be summarized as:
- Assumption: The past is a good indicator of the near-future.
- Pros: Simple, Intuitive, Easy back and stress test, No distribution assumption, No calibration.
- Cons: Poor accuracy for higher confidence level and tail risk, Difficult for long horizons, Limited scenario.
| Related Topics |