the calculation coefficient of p>VaR mainly includes three coefficients: first, the length of holding period; The second is the size of confidence interval; The third is the observation period.
1. Holding period. Holding period △t, that is, to determine the maximum loss value of assets held in a certain period of time, that is, to clarify whether risk managers care about the risk value of assets within one day, one week or one month. The choice of holding period should be determined according to the characteristics of the assets held. For example, for some highly liquid trading positions, it is often necessary to calculate the risk return and VaR on a daily basis. For example, in the practice and rules of derivatives in 1993, G3 Group suggested that the VaR of OTC derivatives should be calculated on a daily basis, while for some long-term positions such as pension funds and other investment funds, it can be calculated on a monthly basis.
From the overall risk management of banks, the choice of holding period depends on the frequency of portfolio adjustment and the possible rate of liquidation of corresponding positions. The Basel Committee adopted a conservative and steady attitude in this regard, requiring banks to hold for two weeks, that is, 1 business days.
2. Confidence level α. Generally speaking, the choice of confidence interval reflects the different preferences of financial institutions for risks to some extent. Choosing a higher confidence level means that they are more averse to risks, and hope to get a more confident prediction result, and hope that the model can predict extreme events with higher accuracy. According to their different risk preferences, the confidence intervals chosen are also different. For example, J.P. Morgan and Bank of America chose 95%, Citibank chose 95.4%, Chase Manhattan chose 97.5% and Bankers Trust chose 99%. The Basel Committee, as the financial supervision department, requires 99% confidence interval, which is consistent with its steady style.
3. The third coefficient is the Observation Period. The observation period is the overall length of time to investigate the volatility and relevance of returns for a given holding period, and it is the time range for the whole data selection, sometimes called Data Window. For example, choose a portfolio in the next six months, or one year's observation period, and examine the volatility (risk) of its weekly return. This choice should be balanced between the possibility of historical data and the risk of structural changes in the market. In order to overcome the influence of cyclical changes such as business cycle, the longer the historical data, the better, but the longer the time, the greater the possibility of structural changes in the market such as mergers and acquisitions, and the more difficult it is for historical data to reflect the reality and future situation. The observation period currently required by the Basel Committee on Banking Supervision is one year.
to sum up, the essence of VaR is the unilateral critical value of asset value loss after a certain holding period at a certain confidence level, which is reflected in the amount as the critical point in practical application.
Tips: The above information is for reference only.
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