Upgrade: VaR and Expected Shortfall to Liquidation Based on Asian Put Option Formula and Tail Volatilities & Correlations
Posted: 17 Feb 2017
Date Written: January 20, 2017
Abstract
Asian VaR and coherent Asian Expected Shortfall are an improvement over current methods, measuring more accurately financial portfolio market and liquidity risks. Risk to LIQUIDATION means every day a portion of portfolio assets-i (i = 1 to Hi) is unwound; thus the final unwind price is the sum of the product of unwound volume-i and day-i, for day-1, day-2,…, day-Hi prices. Includes formulas to calculate Asian VaR – AVaR – and Asian Put – APSF – based on (i) the Asian Black & Scholes European Put; (ii) 1st quintile of historical Markowitz covariance; and (iii) price-trend down or liquidity haircut. To solve AVaR and APSF requires calculating a weighted average horizon-Ĥ for the portfolio. Finally, the new formula is compared to the traditional risk measure, the Bullet VaR to LIQUIDATION – VaRHistorical.
Keywords: VaR, Asian Put Option, PVaR, PSF, Black & Scholes, EMH, Eugene Fama, Tail histogram, Markowitz
JEL Classification: D81, D89, C13, D49
Suggested Citation: Suggested Citation