Abstract
A second approach, already mentioned at the beginning, to calculate the VaR is an analytical one. It is only approximate, as its assumptions don’t always hold in practice, but it involves fewer computational steps because it relies on sensitivities and avoids the 1000 × 106 full position pricings. Often it is very close to the VaR obtained in the historical simulation, which makes it a useful sanity-check. It also clearly exposes the relation between the VaR and the sensitivities, volatilities, and correlations. Even more importantly, it provides some helpful analysis tools in dealing with the questions we’re most interested in: How does the VaR react if we change our positions? What risk factors contribute most to the VaR? What is the reason for a particular VaR change?
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Notes
- 1.
Hence this method’s alternative name of variance-covariance approach.
- 2.
The variance “\({\mathrm {\mathbb {V}ar}}\)” is not the value-at-risk “VaR.”
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Auer, M. (2018). Analytical Value-at-Risk. In: Hands-On Value-at-Risk and Expected Shortfall. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-319-72320-4_7
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DOI: https://doi.org/10.1007/978-3-319-72320-4_7
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Online ISBN: 978-3-319-72320-4
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