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On the Coherency of Historical Simulation (VaR)
Year Of Publication: 2011
Month Of Publication: April
Pages: 24
Download Count: 12
View Count: 1821
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 8-31-2011
Publisher: Administrator
Summary
The financial crisis led to uncertainty about the risk regulations set on financial institutions throughout the world. Several studies were undertaken and the overconfidence in mathematical and statistical tools like Value at Risk (VaR) was made a key reason why the crisis was not avoided (FSA, 2009). Artzner et al. (1999) proved that VaR is not a coherent risk measure, as it violates the subadditivity property. The lack of subadditivity could misguide the portfolio manager since the diversification bonus cannot be guaranteed. This paper studies the practical side of the nonecoherency proven by Artzner. By using empirical data from S&P 500 and the oil market during 2000 – 2010, the study covers a highly volatile period and a highly volatile oil market (Hamilton, 2009). The findings are also compared to a theoretical study using Monte Carlo simulations and data provided with a student’s t distribution.
Author(s)
Dahl, Roy Endre Sign in to follow this author
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