Transcription of Lecture Note of Bus 41202, Spring 2011: Value at …
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Lecture Note of Bus 41202, Spring 2011: Value at …
Lecture Note of bus 41202 , Spring 2011 : Value at Risk, expected shortfall & Risk management Classification of Financial Risk 1. Credit risk 2. Market risk 3. Operational risk We start with the market risk, because more high-quality data are available easier to understand the idea applicable to other types of risk. What is Value at Risk (VaR)? a measure of minimum loss of a financial position within a certain period of time for a given (small) probability the amount a position could decline in a given period, associated with a given probability (or confidence level). A formal definition: time period given: t = `. loss in Value : L. 1. CDF of the loss F`(x). given (upper tail) probability: p VaR is defined as p = P r[L > VaR] = 1 F`(VaR). Quantile: xq is the 100qth quantile of the distribution F`(x) if q = F`(xq ), , q = P (L xq ).
Lecture Note of Bus 41202, Spring 2011: Value at Risk, Expected Shortfall & Risk Management Classi cation of Financial Risk 1. Credit risk 2. Market risk
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