Value at Risk For Derivatives

Value at risk (VAR) is close to becoming the method of choice for assessing risk exposures faced by financial firms. A new technique is presented that extends the range of assets and returns distributions that can be handled conveniently in a VAR calculation. The framework easily accommodates non-li...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of derivatives 1999-04, Vol.6 (3), p.7-26
Main Authors: El-Jahel, Lina, Perraudin, William, Sellin, Peter
Format: Article
Language:English
Subjects:
Derivatives
Portfolio management
Risk management
Securities analysis
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Value at risk (VAR) is close to becoming the method of choice for assessing risk exposures faced by financial firms. A new technique is presented that extends the range of assets and returns distributions that can be handled conveniently in a VAR calculation. The framework easily accommodates non-linear payoffs, fat-tailed returns distributions, and stochastic volatility. It begins by computing the characteristic function for each asset's return. These are aggregated into the characteristic function for the whole portfolio, which is used to determine the first 4 moments of the returns distribution. Finally, an approximating distribution selected from a general family of distributions is fitted to these moments, and becomes the distribution used for VAR calculations.
ISSN:1074-1240
2168-8524
DOI:10.3905/jod.1999.319116