Assessing Value at Risk for Equity Portfolios: Implementing Alternative Techniques

Wed Jan 01 15:24:38 EST 1997
By Drs. James Jordan and Robert Mackay

This article describes and illustrates three methods of estimating Value at Risk (VaR): historical simulation; the mean-variance, or normal distribution, approach; and Monte Carlo simulation. These techniques are applied to portfolios of common stocks and complex portfolios of stocks and options. For option positions, delta, delta plus gamma and full-valuation estimates are calculated. These VaR estimates are compared for risk horizons of one day, one week and one month. Bootstrapping and factor models are also illustrated.

This article was published as a chapter in "Derivatives Handbook: Risk Management and Control," ed. Robert J. Schwartz and Clifford W. Smith, Wiley & Sons Publications, May 1997. The book can be purchased by following the link below.