Nested simulation in portfolio risk measurement
Risk measurement for derivative portfolios almost invariably calls for nested simulation. In the outer step one draws realizations of all risk factors up to the horizon, and in the inner step one re-prices each instrument in the portfolio at the horizon conditional on the drawn risk factors. Practitioners may perceive the computational burden of such nested schemes to be unacceptable, and adopt a variety of second-best pricing techniques to avoid the inner simulation. In this paper, we question whether such short cuts are necessary. We show that a relatively small number of trials in the inner step can yield accurate estimates, and analyze how a fixed computational budget may be allocated to the inner and the outer step to minimize the mean square error of the resultant estimator. Finally, we introduce a jackknife procedure for bias reduction and a dynamic allocation scheme for improved efficiency.
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- Christian Gourieroux & J. P. Laurent & Olivier Scaillet, 2000.
"Sensitivity Analysis of Values at Risk,"
Econometric Society World Congress 2000 Contributed Papers
0162, Econometric Society.
- Gouriéroux, Christian & Laurent, J.P. & Scaillet, Olivier, 1999. "Sensitivity Analysis of Values at Risk," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jan 2000.
- C. Gourieroux & J.P. Laurent & O. Scaillet, 2000. "Sensitivity analysis of values at risk," THEMA Working Papers 2000-04, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Christian Gourieroux & Jean-Paul Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Working Papers 2000-05, Centre de Recherche en Economie et Statistique.
- Acerbi, Carlo & Tasche, Dirk, 2002.
"On the coherence of expected shortfall,"
Journal of Banking & Finance,
Elsevier, vol. 26(7), pages 1487-1503, July.
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- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- repec:fth:inseep:2000-05 is not listed on IDEAS
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
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