LECTURE 8 NOTES

LECTURE 8 NOTES - Lecture 8: The VaR measure Market risk...

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Lecture 8: The VaR measure Market risk VaR: historical simulation approach Market risk VaR: model-building approach The VaR Measure: Definition of VaR: We are X percent certain that we will not lose more than V dollars in the next N days. (How bad can things get?) This is an attempt to provide a single number that summarizes the total risk in a portfolio of financial assets. Expected Shortfall (Conditional VaR or tail loss): It’s the expected loss during an N-day period conditional on the loss being greater than the Xth percentile of the loss distribution. (If things do get bad, what is the expected loss?) Properties of Risk Measures: A risk measure used for specifying capital requirements can be thought of as the amount of cash (or capital) that must be added to a position to make its risk acceptable to regulators. A risk measure should have a number of properties: a) Monotonicity: If a portfolio has lower returns than other portfolio for every state of the world, its risk measure should be greater. b) Translation invariance: If we add an amount of cash K to a portfolio, its risk measure should go down by K. c) Homogeneity: Changing the size of a portfolio by a factor lambda while keeping the relative amounts of different items in the portfolio the same should result in the risk
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This note was uploaded on 11/18/2011 for the course FIN 353 taught by Professor Cobus during the Fall '08 term at S.F. State.

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LECTURE 8 NOTES - Lecture 8: The VaR measure Market risk...

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