Value at Risk (VAR): Comparing Historical Simulation and Model-Building Approach
Proceedings of Research for a better tomorrow: Impacts in the 21st Century Conference
3 Pages Posted: 23 Sep 2009
Date Written: August 7, 2009
Abstract
Value at Risk (VAR) is one of the most widely used tools in both financial and non-financial sectors for estimating losses (downside risk). This paper will focus on the comparison of two methods that can be used to compute the VAR; namely the Historical Simulation Approach and the Model-Building Approach. The paper is structured as follows: chapter 2 will review the theories on both methods and discuss possible theoretical advantages, drawbacks and other implications. Chapter 3 presents the data and analysis that will be used in the study. Chapter 4 will analyse the results obtained under each of the abovementioned methods. While the focus is on Historical Simulation and Model-Building Approach, Chapter 5 will make a comparative analysis of the two methods and take into account the possible improvements that can be brought about to increase the accuracy of the VAR measure and this might give more insight on the practicability and applications of VAR in real life situations.
Keywords: VAR, Value at Risk, historical simulation, model-building approach
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