Value At Risk Incorporating Dynamic Portfolio Management
AbstractValue at Risk calculations traditionally assume a fixed portfolio. However, occasionally, over a medium term horizon, a particular model of trading behavior is applicable and a dynamic portfolio should be considered for accurate VaR calculation. In this paper I describe a Monte Carlo simulation technique to calculate the distribution of portfolio returns over a several day horizon. I develop a bootstrap method for generating simulated returns from the underlying financial instruments, as well as investigate the theoretical statistical properties of the estimates. At each stage of the calculation, several behavioral trading models are considered to test the effect of back office restrictions on a portfolio manager's risk exposure. Finally, using daily currency rates, the model is tested empirically for estimation accuracy.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 147.
Date of creation: 05 Jul 2000
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