18

275-285

11

 

John Wiley & Sons, Inc. (Visit publisher website)

2002

English

 

 

 

Intermediate

 

 

Parameter estimation, estimation error, value at risk

 

By knowing the assumptions and limitations of VaR methods, a portfolio manager could game the value at risk by exploiting estimation errors that cause the value at risk calculation to underestimate actual risk. This chapter explains how estimation errors in the covariance matrix can be exploited, allowing a portfolio manager to enter positions that exceed risk limits. The chapter ends with a discussion of the practical use of value at risk in investment management.

 

18.1 Gaming estimation errors in the covariancce matrix
18.2 Gaming estimation errors in the covariance matrix: simple example
18.3 Gaming estimation errors in the covariance matrix: general case
18.4 Other assumptions about the portfolio manager`s behavior
18.5 How reasonable is this?
18.6 Notes

 

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*** From the publisher ***
Covers the hottest topic in investment for multitrillion pension market and institutional investors.
Institutional investors and fund managers understand they must take risks to generate superior investment returns, but the question is how much. Enter the concept of risk budgeting, using quantitative risks measurements, including VaR, to solve the problem. VaR, or value at risk, is a concept first introduced by bank dealers to establish parameters for their market short-term risk exposure. This book introduces VaR, extreme VaR, and stress-testing risk measurement techniques to major institutional investors, and shows them how they can implement formal risk budgeting to more efficiently manage their investment portfolios. Risk Budgeting is the most sophisticated and advanced read on the subject out there in the market.