Re: What about 30-day 99% VaR...

From: Andreas Steiner
Affiliation:
Address: performanceanalysis@andreassteiner.net
Date: 13 Nov 2006
Time: 04:50:37

Comments

Glyn, I agree that the notion of comparing VaR of portfolio containing derivatives to a a reference portfolio without derivatives is an elegant one, I have problems with the idea of "measuring leverage via VaR". Leverage is essentially a deterministic concept (=a leverage of 4:1 means that it takes an adverse market move of 25% to drive a portfolio/organisation into severe solvency issues), but VaR is a probabilistic concept making a statement about one point located at the far left tail of the profit/loss distribution. The situation is further complicated by the fact that two portfolios with exactly the same VaR (or VaR-to-reference-portfolio ratio) can have very different leverage in the sense of financial gearing. I think what the regulator wants is two things: 1) Keeping an eye on mutual fund solvency with the help of an overall exposure limit of 200% (national implementations of UCITS III usually also specify that derivatives exposure have to be backed by liquid spot market "underlying" positions), 2) Requiring at least "sophisticated" products to publish a market risk indicator (VaR) in order to create at least a minimum of transparency of market risks. Just bouncing thoughts.

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