An Analysis of the Maximum Losses Expected Calculated by VaR (Value at Risk) in Moments of Systematic Crisis

18 Pages Posted: 3 Dec 2010

See all articles by Bruno V. Ramos Fernandes

Bruno V. Ramos Fernandes

Universidade de Brasília (UnB)

Paulo Roberto B. Lustosa

University of Brasilia

Edilson Paulo

Federal University of Paraiba

Date Written: July 1, 2010

Abstract

One of the main ways of measuring risks is the calculation of the VaR (Value at Risk), where the risk is measured in value. One of the assumptions of VaR is that the distribution of the financial assets returns follows a normal distribution, but what has evidenced in recent years is a distribution with more extreme values, mainly in function of unexpected financial crises by normality. Therefore, financial disasters are not often enshrined in the maximum expected losses by the financial market. The present work had as its overall objective: To verify if the VaR manages to capture the maximum expected loss in moments of systemic crisis, as well as to analyze which of the three methods used for the calculation has the slightest error in their estimates. To achieve the general objective, the VaR was calculated daily, during the period from 1993 to 2010, with mobile windows, using three methodologies: normal linear, historical simulation and Monte Carlo simulation. It was found that in moments of systemic crisis the VaR is unable to predict accurately the expected maximum loss, not properly safeguarding the investor as the volatility of the asset. Among the three methodologies, the one that possesses the less error (excess loss) is the historical simulation, being that the other two, normal linear and Monte Carlo simulation, are technically equally in the errors, this means, there is no difference in the forecasts of maximum losses.

Keywords: Value at Risk, Maximum Losses, Systemic Crisis

Suggested Citation

Ramos Fernandes, Bruno Vinícius and Lustosa, Paulo Roberto B. and Paulo, Edilson, An Analysis of the Maximum Losses Expected Calculated by VaR (Value at Risk) in Moments of Systematic Crisis (July 1, 2010). Available at SSRN: https://ssrn.com/abstract=1718613 or http://dx.doi.org/10.2139/ssrn.1718613

Bruno Vinícius Ramos Fernandes (Contact Author)

Universidade de Brasília (UnB) ( email )

Campus Universitário Darcy Ribeiro
Asa Norte
Brasília, Distrito Federal 70910-900
Brazil
55 61 3107 0796 (Phone)

HOME PAGE: http://www.unb.br/cca

Paulo Roberto B. Lustosa

University of Brasilia ( email )

Brasilia/DF, 70.910-900
Brazil

Edilson Paulo

Federal University of Paraiba ( email )

João Pessoa, Paraiba 58038-382
Brazil

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