[R-SIG-Finance] [R-sig-finance] VaR

david.jessop at ubs.com david.jessop at ubs.com
Wed Mar 4 12:40:54 CET 2009


A very simple (if somewhat artificial) example.  Suppose you have an
option which pays off zero 96% of the time and -10 4% of the time.  The
95% VaR is zero (obviously).  Now suppose you have another similar
option on an uncorrelated event, the VaR of this is also zero.  Now
combine them together.  There is a 92.2% probability of getting zero,
0.2% of getting -20 and 7.6% of getting -10. Hence the VaR of the
combined portfolio is -10.  

In the case of equities or anything with a reasonable distribution this
type of thing is unlikely to happen. 



Message: 1
Date: Tue, 3 Mar 2009 03:20:55 -0800 (PST)
From: Bogaso <bogaso.christofer at gmail.com>
Subject: [R-SIG-Finance] [R-sig-finance] VaR
To: r-sig-finance at stat.math.ethz.ch
Message-ID: <22306743.post at talk.nabble.com>
Content-Type: text/plain; charset=us-ascii

I frequently hear Value at risk i.e. VaR is not a coherent risk measure
because, sum of VaR for two individual assets may be LOWER than VaR of
portfolio consists of that two aseets i.e. VaR may not be sub-additive.
However when I calculate VaR for general assets like Equity, commodity
I see that VaR is actually sub-addtive i.e. portfolio VaR is always less
than sum of individuals, which is reported as "diversification benefit".
anyone give me a particular example why VaR is not sub-additive?

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