[R-SIG-Finance] Framework for VAR allocation among traders

kriskumar at earthlink.net kriskumar at earthlink.net
Sat Mar 15 14:37:46 CET 2008

My two cents on this... to paraphrase taleb using var to manage risk or allocate capital is like driving an airplane with a faulty altimeter. Probably ok in quieter markets but quite risky in these turbulent markets. I might be mistaken but I think  comp VaR is not additive?

Finally if you are going to use this because of Basel-2 etc I think it is key to make sure that it is not gamed. 


"When I get a little money, I buy books and if any 
      is left, I buy food and clothes."  -- Erasmus

-----Original Message-----
From: "Joe W. Byers" <ecjbosu at aol.com>

Date: Sat, 15 Mar 2008 07:19:20 
To:r-sig-finance at stat.math.ethz.ch
Cc:r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] Framework for VAR allocation among traders

Brian G. Peterson wrote:
> On Thursday 13 March 2008 22:32:59 adschai at optonline.net wrote:
>> Hi,I'm looking for VAR allocation framework among traders. I saw some
>> papers but none of which (at least that I saw) look practical. I am
>> wondering if anyone can hint me some idea or some reference? The situation
>> is if at the desk level you were given a certain amount of VAR limit, how
>> should one allocate the number among traders? THank you.adschai
> Calculate Component VaR.
> The first definition (as far as I know) is in Garman in Risk Magazine.  The 
> article may be found here:
Riskmetrics is also a good resource for this
The first two publications with the second having component var.  Note 
riskmetrics and jorion's definitions of component var differ.

> Garman, Mark, "Taking VaR to Pieces (Component VaR)," RISK 10, 10, October 
> 1997.
> http://www.fea.com/pdf/componentvar.pdf
> He also has a longer working paper on the topic here:
> http://www.gloriamundi.org/detailpopup.asp?ID=453055537
> We implemented Component VaR for assets with non-normal distribution in our 
> recent paper here:
> Boudt, Kris, Peterson, Brian G. and Croux, Christophe, "Estimation and 
> Decomposition of Downside Risk for Portfolios With Non-Normal Returns" 
> (October 31, 2007).
> http://ssrn.com/abstract=1024151
> All code for our paper was implemented in R, and is available.  We will also 
> be cleaning up and documenting the functions in the next version of 
> PerformanceAnalytics.
> Regards,
>     - Brian

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