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Efficient Monte Carlo Methods for Value-at-Risk
Company: Columbia University
Company Url: Click here to open
Year Of Publication: 2000
Month Of Publication: April
Pages: 17
Download Count: 25189
View Count: 96537
Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 9-19-2002
Publisher: Administrator
Summary
The calculation of value-at-risk for large portfolios presents a tradeoff between speed and accuracy, with the fastest methods relying on rough approximations and the most realistic approach - Monte Carlo simulation - often too slow to be practical. This article describes methods that use the best features of both approaches. The methods build on the delta-gamma approximation, but they use the approximation not as a substitute for simulation but rather as an aid to it. We use the delta-gamma approximation to guide the sampling of market scenarios through a combination of importance sampling and stratified sampling. This can greatly reduce the number of scenarios required in a simulation to achieve a desired precision. We also describe an extension of the method in which "vega" terms are included in the approximation to capture changes in the level of volatility.
Author(s)
Glasserman, Paul Sign in to follow this author
Heidelberger, Philip Sign in to follow this author
Shahabuddin, Perwez Sign in to follow this author
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