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Option Portfolio Value At Risk Using Monte Carlo Simulation Under A Risk Neutral Stochastic Implied Volatility Model

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  • Peng He

Abstract

This paper calculates option portfolio Value at Risk (VaR) using Monte Carlo simulation under a risk neutral stochastic implied volatility model. Compared to benchmark delta-normal method, the model produces more accurate results by taking into account nonlinearity, passage of time, non-normality and changing of implied volatility. Two parameters in the model: the correlation between underlying and the at –the-money implied volatility and the volatility of percentage change of the at- the-money implied volatility, can explain market skew phenomena quite well.

Suggested Citation

  • Peng He, 2012. "Option Portfolio Value At Risk Using Monte Carlo Simulation Under A Risk Neutral Stochastic Implied Volatility Model," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 6(5), pages 65-72.
    • Handle: RePEc:ibf:gjbres:v:6:y:2012:i:5:p:65-72
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Stochastic Implied Volatility Model; Value at Risk; Market Skew Phenomena;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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