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Risk Measurement: An Introduction to Value at Risk

Author

Listed:
  • 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.

Suggested Citation

  • Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:9609004
    Note: Type of Document - MS Word 7; prepared on PC; to print on HP;
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    More about this item

    Keywords

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

    JEL classification:

    • G - Financial Economics

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