Intro to Quant Finance: Value at Risk (VaR)

The basic approach to VaR is delta normal: a scaled standard deviation

Category:

Education

Tags:

• Finance
• Excel
• Quantitative
• Quant

[TheStormPulse]

Does anyone know if there is a bionic turtle video about "spectral risk measure"? - I can't find one at least

[bionicturtledotcom]

@TheStormPulse I don't think we have one, I added to our requested topics list, thanks for your interest!

[akathetruthteller]

dude, i don't think your VAR calculation is correct. your assuming that the distribution of the return has mean 0 then the var is simply a scaled variance.but you didn't mention anywhere that your are assuming that the access return is 0. or risk free

[bionicturtledotcom]

@akathetruthteller right, agreed but it's not incorrect so much as i should have clarified this is a relative VaR not an absolute VaR where the relative VaR ignores the drift (i.e., relative to future expected value) and the absolute VaR--to your point-- is the VaR reduced by the drift (if drift is zero, they are the same).

Please note my comment from two years ago has the terms mistakenly reversed, should be:

relative VaR = volatilty*deviate

absolute VaR = -mean + volatilty*deviate

thanks!

[briano8713]

The Gaussian has proven to be a terrible predictor of extreme events in this context, and other methods (like using a "power law" or a polynomial with scale invariance) have been much more accurate. What gives?

[bionicturtledotcom]

Brian, of course you are correct. The reason the normal is used (here and often) is merely to introduce VaR as the quantile of a distribution (i.e., any distribution!) ... those normal is friendliest to the new learner...once we explain how VaR is "merely a quantile" then we can deal in the various approaches, parameteric or otherwise...although re: power law & heavy-tail distributions, you still have the issue of "does any parametric distribution" *really* fit the tail? David

[Sashaeagle]

David, thank you! Simplification of the complex things makes me understand quant finance.

Also could tell me please how to create a chart of density in Excel?

[social90climber]

Dear Mr. Harper,

I am really a great fan of yours. I have really learned a lot from these sort of videos from you.

Please keep uploading these, I have recommended many friends of that.

Thanks n Regards,

Samran Habib

Dubai

UAE

[riddd9]

Hi! I also do not think this is correct. You say that VaR is z-alpha*std away from zero which you implicitly assume to be the mean. This would only be the case if you assume that the distribution is standard normal. Nevertheless, your mean is -0.71% so sth is wrong here. What about VaR=z-alpha*std - 0.0071 ?

[KoalaBearWarrior]

Bionic Turtle, you are a God among Quants. 

[samiwistler]

Like

[prodigee411]

@briano8713 Yes, historically, bubbles and crashes appear when the markets move several standard deviations beyond the "historical mean"(historical mean is useless, since the inputs to that mean are changing every second with new data/behavior).

[briano8713]

@prodigee411 Do you mean to say trend-following (as an approach) creates the observed fat-tailed/asymmetric distributions of returns?

[prodigee411]

@briano8713 Trend Following.