Value at Risk.pptVIP

Value at Risk Concepts, data, industry estimates Adam Hoppes Moses Chao Portfolio applications Cathy Li Muthu Ramanujam Comparison to volatility and beta John Summers Wei-Hao Tseng Value at Risk: The objective of this presentation is to introduce an alternative way of looking at risk. Data Description: Monthly returns from 1970 to 2001 were collected on the following industries and the total market(NYMEX, AMEX, NASDAQ). Industries: SIC Codes: Households (2047-3995) Chip Manufactures (3622-3812) Transportation (4000-4789) Oil (1399-2999) Source: /pages/faculty/ken.french/ Each company is assigned to an industry portfolio based on their SIC code. Value weighted monthly returns are used for the analysis. Description of Value at Risk: Definition: Value at Risk is an estimate of the worst possible loss an investment could realize over a given time horizon, under normal market conditions (defined by a given level of confidence). To estimate Value at Risk a confidence level must be specified. Illustrate Value at Risk: Step 1: Transform simple monthly stock returns into continuously compounded stock returns. Note: Technically, log stock returns are “more likely” to be normally distributed. Step 2: Choose a level of confidence. 90%, 95%, 99%, etc. Banks are required to report Value at Risk estimated with a 99% level of confidence to determine regulatory capital requirements. Step 3: Compute Value at Risk from sample estimates of ? and ?. For example, the largest likely loss in the household industry over the next month under normal market conditions with a 95% level of confidence is: $18,000. Note: It is possible to realize a loss greater than $18,000. Other Common Interpretations of Value at Risk: “an attempt to provide a single number for senior management summarizing the total risk in a portfolio of assets” – Hull, OFOD “an estimate, with a given degree of confidence, of how much one can lose from one’s portfolio over a given time horizon”