Financial Market Risk

12 Managing VaR and extreme values

 

 

 

 

12.1 Introduction

In this chapter we will summarize some of the results and the consequences of the empirical results of non-Gaussianity, irregularity and nonstationarity of rates of return on cash investment, both for investment in individual assets and for investment in portfolios of assets. In particular, we will focus on the measurement and management of the Value-at-Risk (VaR) of an investment. The VaR measure summarizes the exposure of an investment to market risk as measured by the variance or standard deviation of rates of return. This makes it a popular tool for conveying the magnitude of the market risks of portfolios to senior fund management, directors, sponsors, shareholders and regulators ...