[R-SIG-Finance] Risk management research simulation questions

[Brian G. Peterson]

On Monday 28 August 2006 10:40, Joe Byers wrote:
> Rmetrics group,
>
> I am working on a project to determine the errors associated with
> structural assumptions underlying a companies Value at Risk
> calculation. Normal VAR calculations using a covariance matrix for the
> portfolio assume constant mean or zero mean if the returns are mean
> adjusted. This project calls for creating 4-5 hypothetical assets, 1
> constant mean and variance, 1 seasonal mean and constant variance, 1
> constant mean and seasonal variance, 1 time varying mean (AR or Garch
> in mean), 1 time varying variance (GARCH type).  I want to provide the
> hypothetical parameters for these assets and simulate returns.  I can
> simulate each of these assets as independent but really need correlated
> errors.
>
> These returns will be used to calculate a benchmark risk metrics type
> VAR and then progess through correcting the VAR calculations for each
> case of asses type.
>
> Anyone that is interested, I would appreciate suggestions.  I am also
> favoring co-authorship for this help.

I've had very good success using Modified Cornish-Fisher VaR to handle the 
non-normality of the distribution, occasionally with a weighted average 
of since-inception VaR and rolling period VaR. 

Why wouldn't you choose existing (real) assets with the characteristics 
that you want to use in your simulated portfolios?

If you want to simulate assets, there are several simulation functions in 
RMetrics and in other R packages, and I'd suggest that you start there.  
However, I don't find that these end up looking much like the 
distributions of real assets in practice, so I don't tend to use them 
very often.

Regards,

  - Brian