Non-Linear Value-at-Risk
28 Pages Posted: 21 Sep 1999
There are 2 versions of this paper
Non-Linear Value-at-Risk
Abstract
Value-at-risk methods which employ a linear ("delta only") approximation to the relation between instrument values and the underlying risk factors are unlikely to be robust when applied to portfolios containing non-linear contracts such as options. The most widely used alternative to the delta-only approach involves revaluing each contract for a large number of simulated values of the underlying factors. In this paper we explore an alternative approach which uses a quadratic approximation to the relation between asset values and the risk factors. This method (i) is likely to be better adapted than the linear method to the problem of assessing risk in portfolios containing non-linear assets, (ii) is less computationally intensive than simulation using full-revaluation and (iii) in common with the delta-only method, operates at the level of portfolio characteristics (deltas and gammas) rather than individual instruments.
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Fat-Tailedness of FX Returns
By Ronald Huisman, Kees C. G. Koedijk, ...
-
We Don't Quite Know What We are Talking About When We Talk About Volatility
-
Portfolio Credit Risk with Extremal Dependence
By Achal Bassamboo, Sandeep Juneja, ...