Abstract
The variance-covariance method makes use of covariances (volatilities and correlations) of the risk factors and the sensitivities of the portfolio values with respect to these risk factors with the goal of approximating the value at risk. This method leads directly to the final result, i.e. the portfolio’s value at risk; no information regarding market scenarios arises. The variance-covariance method utilizes linear approximations of the risk factors themselves throughout the entire calculation, often neglecting the drift as well.
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© 2002 Hans-Peter Deutsch
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Deutsch, HP. (2002). The Variance-Covariance Method. In: Derivatives and Internal Models. Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230502109_22
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DOI: https://doi.org/10.1057/9780230502109_22
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-42999-8
Online ISBN: 978-0-230-50210-9
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