[R-sig-Finance] Has anyone done any work on Modified Cornish-Fisher VaR calculations in R?

[Joe Byers]

Brian,

John Hull's text Options, Futures and other derivatives has a nice 
appendix for Cornish Fisher on pagers 370-371.  This example only 
requires linear algebra to approximate the moments.    The appendix does 
not define zq but it is up*sigmap * alphahat where alphahat is the 
require percentile of a standard normal distribution (1%) in the 
appendix's example.

Good Luck
Joe W. Byers
Professor of Finance
The University of Tulsa


> The limitations of VaR in modeling of risk for non-normal distributions 
> have been known for quite some time, and this approach seems to hold some 
> value over other approaches already implemented in RMetrics like 
> Conditional VaR.
>
> I'm trying to replicate the calculation as laid out in: 
> Favre, Laurent, and Jose-Antonio Galeano. ?Mean-Modified
> Value at Risk Optimization with Hedge Funds.? The Journal
> of Alternative Investments, 5 (2002), pp. 21-25.
>
> and presented in a different form in an earlier paper:
> Fallon, William. "Calculating Value-at-Risk" 
> Working Paper, Wharton, 1996.
>
> Both of these papers rely on calculating traditional VaR (as is done with 
> fPortfolio.VaR() from the RMetrics package) and then using a 
> Cornish-Fisher Expansion for skew (both papers) or skew and kurtosis 
> (Favre 2002) (as is done using the fBasics.skewness() and 
> fBasics.kurtosis() functions from RMetrics)
>
> I'm wondering if anyone has already replicated this work in R, and could 
> provide a pointer, or alternately if some of the more experienced people 
> on this list could render an opinion on which of the Cornish-Fisher 
> functions in the core R stats package might be appropriate for this kind 
> of analysis.
>
> I would like to implement and share a function for Modified Cornish-Fisher 
> VaR, so any assistance would be greatly appreciated.
>
> Regards,
>
>    - Brian
>
>
>
> ------------------------------
>
>   
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