The Analysis of VAR, Deltas and State Prices: A New Approach

Rodney L. White Center Working Paper No. 11-96

Posted: 17 Oct 1996

See all articles by Bruce D. Grundy

Bruce D. Grundy

University of Melbourne

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: August 1996

Abstract

We provide a monotonic transformation of an initial diffusion with a level-dependent diffusion parameter that yields a second, deterministic diffusion parameter process. Altering the diffusion parameter while maintaining the original Brownian motion at the expense of the drift can be viewed as a counterpart to Girsanov's Theorem. The transformed process provides a tractable basis for the analysis of the initial probability distribution, and hence provides insights into the value-at-risk (VAR), hedging and valuation of alternate investment strategies. Restrictions on the initial process imply theoretical bounds on VAR, position deltas and state prices, and an empirical bound on option deltas.

JEL Classification: C63, G11, G13

Suggested Citation

Grundy, Bruce D. and Wiener, Zvi, The Analysis of VAR, Deltas and State Prices: A New Approach (August 1996). Rodney L. White Center Working Paper No. 11-96, Available at SSRN: https://ssrn.com/abstract=7824

Bruce D. Grundy (Contact Author)

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
Australia
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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