By Kevin Dowd
This publication presents an advent to price in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring marketplace Risk (John Wiley & Sons 2002).
An creation to marketplace threat Measurement contains assurance of:
- Parametric and non-parametric chance estimation
- Numerical equipment
- Liquidity hazards
- Risk Decomposition and Budgeting
- Stress trying out
- Model threat
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Additional resources for An introduction to market risk measurement
While the theory was straightforward, making this system operational involved a huge amount of work: measurement conventions had to be chosen, data sets constructed, statistical assumptions agreed, procedures determined to estimate volatilities and correlations, computing systems established to carry out estimations, and many other practical problems resolved. Developing this methodology took a long time, but by around 1990, the main elements — the data systems, the risk measurement methodology, and the basic mechanics — were all in place and working reasonably well.
The practitioner needs to be able to deal with a number of different risk ‘signals’ at the same time, under real-time constraints, and the Greeks themselves can be very volatile: for instance, it is well known that the gamma of an at-the-money vanilla option goes to inﬁnity as the option approaches expiry, and the volatility of vega is legendary. In using these measures, we should also keep in mind that they make sense only within the conﬁnes of a dynamic hedging strategy: the measures, and resulting hedge positions, only work against small changes in risk factors, and only then if they are revised sufﬁciently frequently.
9 — that enables us to read off the value of the VaR for any given combination of these two parameters. The shape of the VaR surface shows how VaR changes as the underlying parameters change, and conveys a great deal of risk information. In this particular case, which is also typical of many, the surface rises with both conﬁdence level and holding period to culminate in a spike — indicating where our portfolio is most vulnerable — as both parameters approach their maximum values. 9 A VaR surface.
An introduction to market risk measurement by Kevin Dowd