Historical simulation method: Difference between revisions
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1. | 1. ''Value at Risk''. | ||
In Value at Risk analysis, an alternative to the Delta-normal method of calculating the underlying probability distribution. | In Value at Risk analysis, an alternative to the Delta-normal method of calculating the underlying probability distribution. | ||
Historical simulation is conceptually the simplest alternative method to the delta-normal. There is no assumption about how markets operate. | |||
For any given portfolio held today, you calculate repeatedly its hypothetical value change as if it had been held for a one day period in the past, using the relevant market price changes and other market rate changes for each successive day. | For any given portfolio held today, you calculate repeatedly its hypothetical value change as if it had been held for a one day period in the past, using the relevant market price changes and other market rate changes for each successive day. | ||
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At each step, you do a full valuation and calculate the ex-post or historical value changes over one day. | At each step, you do a full valuation and calculate the ex-post or historical value changes over one day. | ||
Finally, tabulate the empirical distribution of one-day value changes and identify the | Finally, tabulate the empirical distribution of one-day value changes and identify the adverse 95% point. This point is the basis of the one-day 95% VaR. | ||
2. | '''2.''' | ||
Similar methods in other risk analysis applications. | Similar methods in other risk analysis applications. | ||
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== See also == | == See also == | ||
* [[Delta-normal method]] | * [[Delta-normal method]] | ||
* [[Ex-ante]] | |||
* [[Historical method]] | * [[Historical method]] | ||
* [[Monte Carlo method]] | * [[Monte Carlo method]] | ||
Latest revision as of 00:01, 23 March 2021
1. Value at Risk.
In Value at Risk analysis, an alternative to the Delta-normal method of calculating the underlying probability distribution.
Historical simulation is conceptually the simplest alternative method to the delta-normal. There is no assumption about how markets operate.
For any given portfolio held today, you calculate repeatedly its hypothetical value change as if it had been held for a one day period in the past, using the relevant market price changes and other market rate changes for each successive day.
At each step, you do a full valuation and calculate the ex-post or historical value changes over one day.
Finally, tabulate the empirical distribution of one-day value changes and identify the adverse 95% point. This point is the basis of the one-day 95% VaR.
2.
Similar methods in other risk analysis applications.
