Jul 21

Historical simulation approach to value at risk (VaR) – 9 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

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This is an illustration of historical simulation using a single-asset (versus a portfolio). The asset is Google's stock; I pulled daily (periodic) returns for the last 100 days ending with Friday, July 18th (an unrealistically small sample. And note the sample actually includes 101 datapoints). Note the histogram exhibits fat or heavy-tails with the two outliers including Friday's 10% drop. This example shows some of the pros and and cons of historical simulation:

  • Easy to use (pro): it is just a percentile or quantile function
  • Unlike parametric or Monte Carlo, no model risk (pro)
  • Treats all historical observations equally (con)
  • May not be enough data in the tails (con, a classic challenge)

Screencast:

Comments

  1. search 18 Dec 2008

    very very thanks…

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