Abstract
Having examined the static properties of the VaR, we now look into its dynamic behavior over time. As new positions are entered or old ones closed, and as the volatilities of the assets involved change, the VaR, recalculated every day, will change as well. Often, such VaR changes and their reasons are of more interest in risk management than the level of the VaR itself.
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- 1.
The Monte Carlo error depends mainly on the number of Monte Carlo scenarios used. You could analytically determine how far the Monte Caro estimate is likely to be off the limiting case of infinite scenarios, or you can simply try out sets of different random numbers to get an idea of this error range. You may experience, e.g., the Monte Carlo VaR with 5000 scenarios in a real-world portfolio to randomly deviate from the dashed (not dotted!) line by between ± 3% and ± 5% in relative terms.
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Auer, M. (2018). VaR Noise. In: Hands-On Value-at-Risk and Expected Shortfall. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-319-72320-4_14
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DOI: https://doi.org/10.1007/978-3-319-72320-4_14
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Publisher Name: Springer, Cham
Print ISBN: 978-3-319-72319-8
Online ISBN: 978-3-319-72320-4
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