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Finance and Economics Discussion Series : The Hidden Dangers of Historical Simulation downloadPDF, EPUB, MOBI

Finance and Economics Discussion Series : The Hidden Dangers of Historical Simulation. Matthew G Pritsker

Finance and Economics Discussion Series : The Hidden Dangers of Historical Simulation
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Author: Matthew G Pritsker
Page Count: 66 pages
Published Date: 06 Feb 2013
Publisher: Bibliogov
Publication Country: United States
Language: English
ISBN: 9781288716418
File size: 49 Mb
File Name: Finance.and.Economics.Discussion.Series.The.Hidden.Dangers.of.Historical.Simulation.pdf
Download Link: Finance and Economics Discussion Series The Hidden Dangers of Historical Simulation
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Many large financial institutions compute the Value-at-Risk (VaR) of their trading portfolios using historical simulation based methods, but the methods' properties are not well understood. This paper theoretically and empirically examines the historical simulation method, a variant of historical simulation introduced by Boudoukh, Richardson and Whitelaw (1998) (BRW), and the Filtered Historical Simulation method (FHS) of Barone-Adesi, Giannopoulos, and Vosper (1999). The Historical Simulation and BRW methods are both under-responsive to changes in conditional risk; and respond to changes in risk in an asymmetric fashion: measured risk increases when the portfolio experiences large losses, but not when it earns large gains. The FHS method appears promising, but requires additional refinement to account for time-varying correlations; and to choose the appropriate length of historical sample period. Preliminary analysis suggests that 2 years of daily data may not contain enough extreme outliers to accurately compute 1% VaR at a 10-day horizon using the FHS method.

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