By Kevin Dowd
This publication offers an advent to worth in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring industry Risk (John Wiley & Sons 2002).
An advent to industry hazard Measurement comprises insurance of:
- Parametric and non-parametric danger estimation
- Numerical tools
- Liquidity dangers
- Risk Decomposition and Budgeting
- Stress checking out
- Model threat
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Extra info for An introduction to market risk measurement
VaR information can be used in many ways. (1) Senior management can use it to set their overall risk target, and from that determine risk targets and position limits down the line. If they want the ﬁrm to increase its risks, they would increase the overall VaR target, and vice versa. (2) Since VaR tells us the maximum amount we are likely to lose, we can use it to determine capital allocation. We can use it to determine capital requirements at the level of the ﬁrm, but also right down the line, to the level of the individual investment decision: the riskier the activity, the higher the VaR and the greater the capital requirement.
7 VaR and conﬁdence level. Note: Produced using the ‘normalvarplot2D cl’ function. 8 VaR and holding period. Note: Produced using the ‘normalvarplot2D hp’ function. how the same VaR varies as we change the conﬁdence level and keep other parameters constant. In this particular case, the VaR not only rises with the conﬁdence level, but also rises at an increasing rate — a point that risk managers might care to note. We should also remember that the VaR is contingent on the choice of holding period as well, and so we should consider how the VaR varies with the holding period.
However, if we wished to estimate VaRs for reporting or comparison purposes, we would probably wish to use conﬁdence levels (and, indeed, holding periods) that Measures of Financial Risk 25 were comparable to those used by other institutions, and these are typically in the range from 95–99%. We should keep in mind that the ‘best’ choice of these parameters often depends on the context and, where appropriate, we should work with ranges of parameter values rather than particular point values: a VaR surface is much more informative than a single VaR number.