Statistics of Financial Markets – Exercises and Solutions : [PDF Download]

PDF Title:Statistics of Financial Markets
Author:Szymon Borak, Wolfgang Karl H¨ardle & Brenda L´opez Cabrera
Total Page:265 Pages
PDF Size:5.00 MB
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“Monte Carlo: TheMonte Carlo methodology estimates VaR by simulating random scenarios and revaluing positions in the portfolio. Extensive historical data are not needed.

The method is accurate (if used with a complete pricing algorithm) for all instruments and provides a full distribution of potential portfolio values, not just a specific percentile. Monte Carlo simulation permits the use of various distributional assumptions (normal, t-distribution, normal mixture, etc.).

Thus, it can address the issue of fat tails, or leptokurtosis, but only if market scenarios are generated using appropriate distribution assumptions. A disadvantage of this approach is that it is computationally intensive and time consuming, entailing revaluation of the portfolio under each scenario.”

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