An Introduction to Value-at-Risk by Moorad Choudhry

By Moorad Choudhry

The value-at-risk dimension method is a widely-used software in monetary industry possibility administration. The 5th variation of Professor Moorad Choudhry’s benchmark reference textual content An creation to Value-at-Risk deals an obtainable and reader-friendly examine the concept that of VaR and its diversified estimation equipment, and is aimed particularly at rookies to the industry or these unusual with glossy threat administration practices. the writer capitalises on his event within the monetary markets to give this concise but in-depth insurance of VaR, set within the context of danger administration as a whole.

Topics coated include:

  • Defining value-at-risk
  • Variance-covariance methodology
  • Portfolio VaR
  • Credit chance and credits VaR
  • Stressed VaR
  • Critique and VaR in the course of crisis

Topics are illustrated with Bloomberg displays, labored examples and routines. similar matters akin to data, volatility and correlation also are brought as important history for college kids and practitioners. this is often crucial analyzing for all those that require an creation to monetary marketplace probability administration and probability size techniques.

Foreword by means of Carol Alexander, Professor of Finance, college of Sussex.

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Sample text

For both option pricing theory and VaR, it is assumed that the returns from holding an asset are normally distributed. It is often convenient to define the return in logarithmic form as:   Pt ln PtÀ1 where Pt ¼ Price today; PtÀ1 ¼ Previous price. If this is assumed to be normally distributed, then the underlying price will have a log-normal distribution. The log-normal distribution never goes to a negative value, unlike the normal distribution, and hence is intuitively more suitable for asset prices.

Variance–covariance, analytic or parametric method This is similar to the historical method in that historical values of market factors are collected in a database. The next steps are then to: (i) decompose the instruments in the portfolio into the cashequivalent positions in more basic instruments; (ii) specify the exact distributions for the market factors (or ‘returns’); and (iii) calculate the portfolio variance and VaR using standard statistical methods. We now look at these steps in greater detail.

For an investor it is more useful as a relative measure, in comparing the ratio of one investment with that of another. For bank trading desks it is a useful measure of the return generated against the risk incurred, for which the return and volatility of individual trading books can be compared with that on the risk-free instrument (or a bank book trading only T-bills). INTRODUCTION TO RISK 11 Van Ratio The Van Ratio expresses the probability of an investment suffering a loss for a defined period, usually 1 year.

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