Historical simulation method: Difference between revisions
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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. | ||
Revision as of 16:40, 24 December 2019
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.
