Historical VAR

CFA Level III Derivatives
#1

How to handle the number rounding when calculating the historical VAR?

For example, given 170 monthly returns, calculate 1% monthly VAR.

#2

can use either 1 or 2, but since 1.7 i would giess you’d round to 2 - book says either i believe

#3

In the book, I specifically remember that it said you can

i) Take the higher one

ii) average the two numbers

so 1.7, take either 1 or the simple average of 1 and 2

I think its a blue box somewhere.

I will add it if I can find it.

#4

In the book, I specifically remember that it said you can

i) Take the higher one

ii) average the two numbers

so 1.7, take either 1 or the simple average of 1 and 2

I think its a blue box somewhere.

edit - its Blue box 6 page 240

#5

I guess it should be second return ( 170*1%= 1.7%) ranked from worst to best…we choose second coz we prefer to use minimum loss at a given probability…

#6

Thanks a lot.

#7

its blue box# 6,p no 240

#8

Thanks, rahuls.

Just a fun question, what if all the monthly returns are positive? How to interpret the historical VAR in this case?

#9

It doesn’t matter whether they are positive or negative, you will still have a distribution of returns where the smallest returns will be in the lower tail (positive, negative, or zero)

#10

When historical method could be called historical simulation method?

#11

When we use simulated data rather than actual data points that occured in the past.

#12

FinNinja that sounds like the argument behind National Real Estate Prices up until 2007… great example of limitation of historical VAR too.

#13

duplicated

#14

edit: its duplicated prev post.

#15

If all the returns were positive - we would NOT have a VAR. Since we are talking only about Losses - when we talk VAR.

#16

L3

When we use a different portfolio than actually had in the past to calculate historical VAR, it is called historical simulation