value at risk
Value at risk is calculated by using the “Historical simulation” method of VAR. The portfolio is valued repeatedly using historical changes in price over a selected risk (liquidation) period.
This period may be as short as a month, or as long as five years.
The resulting set of data is then subjected to normal or actual data distribution assumptions. (These are setup by the user at run-time, and can be changed at will.)
Historical simulation removes the need for complex statistical data manipulation without losing out on accuracy and, while heavier on computation time, it delivers an answer that is intuitively understandable to the user.
This methodology, unlike many others, can accommodate all market sectors, instrument types and their derivatives.
Deep risk
Deep risk, unlike vanilla VAR, allows the manager to look at his risk over “crisis” periods such as the crash of ’87, 11 Sep 2001, and 2008.
Provided sufficient price and trade-volume data is available, the system is also able to overlay the liquidity exposure during these times, which can often have a material effect on the manager’s ability to square-out positions.
The concept of deep-risk is relatively new, and we are currently working closely in conjunction with our clients to further develop and enhance this part of the VAR module.