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

[Joe Byers]

I want to simulate hypothetical assets so I can control all aspects of 
the tests, from parameters to correlations across assets.  I can 
construct correlations based on minimum variance hedge ratios that will 
allow me to create hedge portfolios with higher weights on some assets 
than others.  This way I can also look at hedging aspects within the VAR 
calculation and the problems with violating the models assumptions.

I have used garchsim and armasim, but as I understand their 
implementation, I am simulating the independent process, not a 
correlated process.

Including the modified cornish VAR is a really good idea as a benchmark 
case as well.

thanks for that suggestion, if nothing else you are entitled to a 
footnote for it.

Thanx
Joe


Brian G. Peterson wrote:
> 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
>   
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