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| Author: | Castellacci, G. Siclari, M.J. |
| Title: | The practice of Delta-Gamma VaR: Implementing the quadratic portfolio model |
| Journal: | European Journal of Operational Research
2003 : NOV, VOL. 150:3, p. 529-545 |
| Index terms: | Value-at-risk Risk analysis Risk management Finance Stochastic processes Simulation Monte Carlo technique |
| Language: | eng |
| Abstract: | This paper intends to critically evaluate state-of-the-art methodologies for calculating the value-at-risk (VaR) of non-linear portfolios from the point of view of computational accuracy and efficiency. The authors focus on the quadratic portfolio model, also known as "Delta-Gamma", and, as a working assumption, the authors model risk factor returns as multi-normal random variables. The authors present the main approaches to Delta-Gamma VaR weighing their merits and accuracy from an implementation-oriented standpoint. One of the main conclusions of this paper is that the Delta-Gamma-Normal VaR may be less accurate than even Delta VaR. On the other hand the authors show that methods that essentially take into account the non-linearity of the portfolio values may present significant advantages over full Monte Carlo Revaluations. |
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