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Risk Measurement: An Introduction to Value at Risk

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Author Info

  • Thomas J. Linsmeier

    (University of Illinois at Urbana-Champaign)

  • Neil D. Pearson

    (University of Illinois at Urbana-Champaign)

Abstract

This paper is a self-contained introduction to the concept and methodology of "value at risk," which is a new tool for measuring an entity's exposure to market risk. We explain the concept of value at risk, and then describe in detail the three methods for computing it: historical simulation; the variance-covariance method; and Monte Carlo or stochastic simulation. We then discuss the advantages and disadvantages of the three methods for computing value at risk. Finally, we briefly describe some alternative measures of market risk.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9609004.

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Date of creation: 26 Sep 1996
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Handle: RePEc:wpa:wuwpfi:9609004

Note: Type of Document - MS Word 7; prepared on PC; to print on HP;
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Web page: http://128.118.178.162

Related research

Keywords: subliminal extant Smith economagic gmm value at risk; market risk; simulation;

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Citations

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Cited by:
  1. Xiongwei Ju & Neil D. Pearson, 1998. "Using Value-at-Risk to Control Risk Taking: How Wrong Can you Be?," Finance 9810002, EconWPA.
  2. Rossignolo, Adrian F. & Fethi, Meryem Duygun & Shaban, Mohamed, 2012. "Value-at-Risk models and Basel capital charges," Journal of Financial Stability, Elsevier, vol. 8(4), pages 303-319.
  3. Rossignolo, Adrián F. & Fethi, Meryem Duygun & Shaban, Mohamed, 2013. "Market crises and Basel capital requirements: Could Basel III have been different? Evidence from Portugal, Ireland, Greece and Spain (PIGS)," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1323-1339.
  4. Mark R. Manfredo. & Raymond M. Leuthold, 1999. "Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk," Finance 9908002, EconWPA.
  5. Wallace, Garry E. & Samsul Huda, A.K., 2005. "Using climate information to approximate the value at risk of a forward contracted canola crop," AFBM Journal, Australasian Farm Business Management Network, vol. 2(1).
  6. Suleyman Basak & Alex Shapiro, . "Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices," Rodney L. White Center for Financial Research Working Papers 06-99, Wharton School Rodney L. White Center for Financial Research.
  7. Billio, Monica & Pelizzon, Loriana, 2000. "Value-at-Risk: a multivariate switching regime approach," Journal of Empirical Finance, Elsevier, vol. 7(5), pages 531-554, December.
  8. Rifki Ismal, 2010. "Volatility of the returns and expected losses of Islamic bank financing," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 3(3), pages 267-279, August.
  9. Mark R. Manfredo & Raymond M. Leuthold, 1998. "Agricultural Applications of Value-at-Risk Analysis: A Perspective," Finance 9805002, EconWPA.
  10. Yass A. Alkafaji & Nauzer Balsara & Judith N. Aburmishan, 2006. "FASB’s Statement No. 133 on Derivatives and Barings Bank: The Case for Value at Risk (VAR)," Accounting Research Journal, Emerald Group Publishing, vol. 19(2), pages 94-104, September.
  11. Karoline Terán Matamoros & Oscar Molina Tejerina, 2005. "Simulación eficiente del valor de riesgo de un portafolio de acciones del IPSA: Un análisis de componentes principales," Investigación & Desarrollo 0205, Universidad Privada Boliviana, revised Mar 2005.

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