var topic from swescheser

sessiljoseph
Good Student
Posts: 22
Joined: Sat Apr 26, 2014 7:29 am

var topic from swescheser

Postby sessiljoseph » Sun May 11, 2014 5:26 am

you are the risk manager of a fund you are using the historical method to estimate Var.You find that the worst 10 daily returns for the fund over the period of last 100 trading days are-1%,-0.3%,-0.6%,-0.2%,-2.7%,-0.7%, -2.9%,-0.1%,-1.1%,-3% what is the daily var for the portfolio at 95% confidence level
a, -0.6%
-0.7%
-1.0%
-3.0%
my doubt is after arranging them in ascending order like,-3,-2.9,2.7,-1.1,1.0,0.7
95/100*100=95 days so -3 is your 100day while -0.7 is coming as 95 day
while in the text book they are considering -1 so my doubt which is correct to take the 5th observation or count the 6th observation
please explain

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

var topic from swescheser

Postby edupristine » Tue Jul 08, 2014 7:21 am

To calculate daily VaR using historical method, first arrange the losses from worst to best.

So, in our example: -3, -2.9, -2.7, -1.1, -1, -0.7, -0.6, -0.3, -0.2, -0.1

Now at 95% confidence interval, the daily VaR would be 1% and not 0.7%. You should take into account 5th observation in case of 95% confidence interval.

The worst 5% of all daily returns are -3, -2.9, -2.7, -1.1, -1

Hence, we can say, 95 % of the time, the daily losses cannot exceed -1%. Put another way, we expect with 95% confidence that our gain will exceed -1%.


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