Hi,

I have a little input. For non-linear portfolio, where movements are mostly
in tail, the parametric models does not do well for its fundamental normal
distributional assumptions, not even the EWMA which is thought to be a
preferred bet for volatility clustering.

Even simulation  model, in my experience is not a good candidate  for
non-linear instruments, specially for options; though there is no
distributional assumptions in historical simulation model, but it is unable
to capture the movement in the tails, specially in volatile regime.

I recommend the Extreme Value Theory (EVT) based VaR model  which is able to
capture movement in the tails. I have implemented Peaks Over Threshold
(POT), a variant of EVT-based model in Matlab. If you like,  I may run you
through.

Best,
Debashis


On 30/01/2009, davidr@rhotrading.com <davidr@rhotrading.com> wrote:
>
> Component VaR aside, Value-at-Risk is very difficult for options
> and non-linear instruments in general. A number of years ago
> RiskMetrics tried to use a delta-gamma approximation, but they
> abandoned it soon since it really didn't work very well. You
> may be able to find a paper or two on it somewhere under that name or
> quadratic VaR, but many of them have been pulled.
> (Check RiskMetrics.com and GloriaMundi.org.)
> Finding the distribution of option values under an assumption of
> a distribution assumption for the underlying is hard.
> Taking volatility skew and such into account makes it harder.
> It may be an interesting exercise to compute it, but using simulation
> is going to be much easier and more useful in the end. Just make sure
> you use a distribution for the underlying that has fat enough tails.
>
> My 2 cents.
> David L. Reiner, PhD
> Head Quant
> Rho Trading Securities, LLC
>
>
> -----Original Message-----
> From: r-sig-finance-bounces@stat.math.ethz.ch
> [mailto:r-sig-finance-bounces@stat.math.ethz.ch] On Behalf Of megh
> Sent: Friday, January 30, 2009 7:07 AM
> To: r-sig-finance@stat.math.ethz.ch
> Subject: Re: [R-SIG-Finance] [R-sig-finance] Conponent VaR for
> someoption portfolio
>
>
> Hi  Guy , thanks so much. This document is really useful. Although I
> think
> that will serve most of my purposes, still I found that they adopted
> Simulation approach to calculate all those analytics. My question is
> that,
> is it possible to have those under Parametric approach?
>
> Thanks and regards,
>
>
> Guy Yollin-2 wrote:
> >
> > I've used this paper as a guide to implementing cvar decomposition in
> > R/S-PLUS:
> >
> > Yamai, Yasuhiro & Yoshiba, Toshinao, 2002.
> > "Comparative Analyses of Expected Shortfall and Value-at-Risk: Their
> > Estimation Error, Decomposition, and Optimization,"
> > Monetary and Economic Studies, Institute for Monetary and Economic
> > Studies, Bank of Japan, vol. 20(1), pages 87-121, January.
> >
> > It's available here:
> >
> > http://www.imes.boj.or.jp/english/publication/mes/2002/me20-1-4.pdf
> >
> > Best,
> >
> > -- Guy
> >
> >
> > -----Original Message-----
> > From: r-sig-finance-bounces@stat.math.ethz.ch
> > [mailto:r-sig-finance-bounces@stat.math.ethz.ch] On Behalf Of megh
> > Sent: Wednesday, January 28, 2009 9:21 PM
> > To: r-sig-finance@stat.math.ethz.ch
> > Subject: [R-SIG-Finance] [R-sig-finance] Conponent VaR for some option
> > portfolio
> >
> >
> > Can people here please guide me how to calculate Componrnt VaR
> > (sensitivity)
> > of an option position, for a portfolio which consists of number of
> stocks
> > and option contracts (put ot call or both). Any document, research
> paper
> > over net is highly appreciated.
> >
> > Thanks
> > --
> > View this message in context:
> >
> http://www.nabble.com/Conponent-VaR-for-some-option-portfolio-tp21704929
> p21704929.html
> > Sent from the Rmetrics mailing list archive at Nabble.com.
> >
> > _______________________________________________
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>
> --
> View this message in context:
> http://www.nabble.com/Conponent-VaR-for-some-option-portfolio-tp21704929
> p21746856.html
> Sent from the Rmetrics mailing list archive at Nabble.com.
>
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