[R-SIG-Finance] Risk management research simulation questions
Joe W. Byers
Joe-Byers at utulsa.edu
Fri Sep 8 18:18:13 CEST 2006
I want to thank everyone that posted replies to this question. You have
provided insight and helped me clarify how to proceed with this project,
along with some additional ideas to incorporate, like the modified
When I get this project to a complete working paper, I will gladly
provide it to you.
Joe Byers wrote:
> 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.
> 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
>>> 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.
>> - Brian
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