Phorgy Phynance

Daily S&P 500 Value-at-Risk Estimates

with 3 comments

A few people have commented about the methodology used to produce the charts in my last post. Keep in mind, I threw those together quickly for Felix based on charts already put together for a seminar at UCLA. If you want to see what I actually look at on a regular basis, I put the following chart together:

SP500VaR_10yr_linear_annotated

This is the 99%, 1-day VaR using a weighting scheme that places more weight on the most recent data.

Again, note the divergence between the two charts in recent months. Risk systems (like most third party vendors) based on normal distributions are likely indicating that risk continues to decrease. However, the stable distribution indicates the opposite, i.e. risk has begun increasing again.

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Written by Eric

August 8, 2009 at 9:49 am

3 Responses

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  1. I think I know what you mean when you write, “risk has begun increasing again,” but are you sure you want to phrase that way? Among my least favorite neologisms is the replacement of words referring to realized variance or calculations based thereon with the word “risk” which, in normal English, primarily is prospective.

    wcw

    August 10, 2009 at 1:43 pm

    • Hi wcw,

      I can appreciate your concern over semantics. VaR (“normal” or “stable”) is not synonymous with “risk”, but it most certainly is a component of risk. As a former physicist, I tend to think of risk as a vector (e.g. see Visualizing Market Risk). These quant risk measures merely project out certain dimensions of risk, but there are large unmeasured risks that remain that can dominate.

      If you can come up with a term that is better than “risk” to describe these charts that will not make a portfolio manager’s eyes glaze over, please let me know 😉 I doubt anyone who is responsible for managing money would look at these charts and assume they capture all risks, but the charts do capture an empirical dimension of risk that I think justifies the use of the word.

      Cheers

      phorgyphynance

      August 10, 2009 at 1:52 pm

  2. Ok so think about what’s being said here. Value at risk spiked. That doesn’t make sense in the literal use of the words, and the literal use is the useful question.

    quantum probability

    November 18, 2010 at 5:00 am


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