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Notes
- 1.
If the portfolio valuation requires for example Monte Carlo pricing methods for some (exotic) financial instruments, these additional Monte Carlo simulations (for pricing) have to run inside the simulation loop for the VaR calculation. Clearly this may lead to unacceptably large computation times.
- 2.
The number of available liquidation periods obtained from the historical time span for which data is available is denoted by m, the number of relevant risk factors again by n.
- 3.
In the second case, the liquidation periods overlap resulting in auto-correlations.
- 4.
A historical change for example, a 12 point change in the DAX index which stood at 1200 at the outset of a liquidation period is quite different from a 12 point change when the DAX is at 7000. A relative change of 1% (i.e., 70 points) is therefore more suitable. This is not necessarily the best choice for all possible risk factors, though. For interest rates, absolute shifts are also applied frequently.
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Deutsch, HP., Beinker, M.W. (2019). Simulation Methods. In: Derivatives and Internal Models. Finance and Capital Markets Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22899-6_23
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DOI: https://doi.org/10.1007/978-3-030-22899-6_23
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