[R-SIG-Finance] Portfolio Value at Risk - A conceptual problem

[Arun.stat]

Dear Amy, assuming you have sufficient amount of historical data, you should
calculate return collectively, because calculating return separately will
destroy the correlation pattern implicit within the historical quotes
therefore you may not address properly the diversification effect in your
VaR figure.

Instead of directly valuing portfolio (and then portfolio return) based on
historical quotes I would prefer to find out the historical realized return
(may be logarithmic or percentage) and construct a hypothetical price
distribution (by taking antilog or something like) for next day (assuming
VaR horizon is 1 day) and then find the possible distribution of portfolio
values for next day. This always makes sense as price series is never
stationary/stable but returns are. Here the fact is to find answer like,
previously on some date I got that return therefore what if same return gets
realized from 1 day holding. This inference you can never make had you taken
raw price because 1 year back price may be 50pt lower than current level,
hence in a single day you can never achieve that level (ofcourse assuming
tomorrow another layman brother would not fall on your head!) of price but
with return you can.

Thanks,
Arun
-- 
View this message in context: http://r.789695.n4.nabble.com/Portfolio-Value-at-Risk-A-conceptual-problem-tp3003552p3003837.html
Sent from the Rmetrics mailing list archive at Nabble.com.