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Worst Fluctuation Method for Fast Value-at-Risk Estimates

Jean-Philippe Bouchaud
Centre d'Etudes de Saclay (CEA) - Service de Physique de l'Etat Condense (SPEC); Capital Fund Management - Department of Science and Finance

Marc Potters
Capital Fund Management - Department of Science and Finance

September 16, 1999

Abstract:
We show how one can actually take advantage of the strongly non-Gaussian nature of the fluctuations of financial assets to simplify the calculation of the Value-at-Risk of complex non linear portfolios. The resulting equations are not hard to solve numerically, and should allow fast VaR and Delta-VaR estimates of large portfolios, where by construction the influence of rare events is taken into account reliably. Our method can be seen as a correctly probabilized `scenario' calculation (or 'stress-testing').

JEL Classifications: G11, G12, G13

Working Paper Series

Date posted: October 21, 1999 ; Last revised: November 18, 1999

Suggested Citation

Bouchaud , Jean-Philippe and Potters, Marc, Worst Fluctuation Method for Fast Value-at-Risk Estimates (September 16, 1999). Available at SSRN: http://ssrn.com/abstract=181949 or doi:10.2139/ssrn.181949

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Contact Information

Marc Potters (Contact Author) Capital Fund Management - Department of Science and Finance ( email ) 6 boul Haussmann Paris 75009 France +33 1 49 49 59 10 (Phone) +33 1 47 70 17 40 (Fax) HOME PAGE: http://www.cfm.fr
Jean-Philippe Bouchaud Centre d'Etudes de Saclay (CEA) - Service de Physique de l'Etat Condense (SPEC) ( email ) Orme des Meurisiers 91191 Gif-sur-Yvette cedex France +33 1 69 08 73 45 (Phone) +33 1 69 08 87 86 (Fax)
Capital Fund Management - Department of Science and Finance ( email ) 109-111 rue Victor Hugo Levallois 92532 France +33 1 69 08 73 45 (Phone) +33 1 69 08 87 86 (Fax)