[R-SIG-Finance] Framework for VAR allocation among traders
Brian G. Peterson
brian at braverock.com
Sat Mar 15 13:51:36 CET 2008
On Saturday 15 March 2008 08:37:46 kriskumar at earthlink.net wrote:
> 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 recommend against using a normal distribution assumption at any time. One
of the reasons I like the Cornish Fisher expansion for incorporating
non-normality is that it directly ustilizes skewness and kiurtosis, which
have meaning independent of the VaR calculation. Extending this to Component
VaR (or ES) incorporates the higher co-moments as well.
I also think that measuring VaR (preferably without assuming the normal) and
stress or scenario testing the portfolio are two separate and complimentary
Kris has mentioned Taleb ("Black Swans"), and I can also recommend
Rebonato's "Plight of the Fortune Tellers" as an excellent deconstruction of
many current risk practices (without resorting to the math).
> I might be mistaken but I think comp VaR is not additive?
Component VaR and Component ES are coherent risk measures (per Artzner), and
What most authors call Marginal VaR is *not* subadditive.
> 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.
Wholeheartedly agreed. Note that the regulators require both VaR calculation
and stress tests, as described above.
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