Historical simulation method

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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.

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.


Similar methods in other risk analysis applications.

See also