Financial Risk Management

Computing Value at Risk Following P. Jorion, Value at Risk, McGraw-Hill Chapter 5

Daniel HERLEMONT

Steps

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Steps

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VAR for general distribution
The relative VAR to the mean


Absolute VAR


For short horizon it makes no difference, since the mean is usually small

Daniel HERLEMONT

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VAR for parametric distribution
VAR for normal distribution


In other word, if normality is assumed VAR is simply proportional to volatility
This is not the case for distribution with fat tails

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How Normal approximation works in practice

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VAR as a risk measure see FRM chapter 11 presentation

Daniel HERLEMONT

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