Bootstrapping value at risk (VaR)

This is an illustration, using a simple portfolio of four stocks over one week, of the bootstrap method. Like the Monte Carlo, we want to simulate each stock (in the portfolio) forward in time. If today is time t, then we want to simulate the stock on t+1, t+2, t+3, etc. The key difference is: The Monte Carlo uses an algorithm (e.g., geometric Brownian motion) to simulate the stock on t+1. In MCS, the randomness is applied in the algorithm; it informs the stochastic process
But The bootstrap does not have an algorithm. The bootstrap randomizes the selection of a historical period (a day within the historical window). Once that historical day is selected, the cross-section of returns (the vector = the daily return for each stock in the portfolio) is used to simulate the portfolio going forward.

Category:

Education

Tags:

• Finance
• Quant
• Risk

[Kasnopich]

@Kasnopich every after pressing f9

[Kasnopich]

how was the cell formatted below the random numbers to follow the columns above?

[trijoko92]

good video, very easy to understand. Thanks !!

[caetans]

hey nice video!! what do you mean by cross-section of returns?

[allensugar]

hey bionic turtle, can you direct me to the statistical/mathematical reasoning of bootstrapping, I understand the method involved but not the math motivating the model.

[perrinms]

Thanks! This really helped me understand bootstrapping.

[rober2eduardo]

Hey Dave,

It is clear to me how you generate the numbers on row 19 via int(rand()*5)+1. What is not clear to me is how do you "attach" the contents (the column) to that generated number. Can you please explain? Post the formula? Thank you.

[fistylo]

hello maestro.

clear in your way to show your know how.i hope more about portfolio optimization