IST-ISEG-MIT

Quantitative Risk Management

Spring 2014

Agnieszka Bergel

Example

Problems

Implementation of standard methods on a market risk example

The aim of this session is to implement the standard methods and to compare their performance
using backtesting on the estimated VaRs calculated on the data set from UBS & CREDIT SUISSE
following the instructions below:

In the le data ubsCS.csv (comma separated values) columns from 2 to 6 correspond to UBS and
columns from 8 to 12 correspond to CREDIT SUISSE. You hold a portfolio of 1 share of UBS and 10
shares of CREDIT SUISSE since January 2000.
Exercise 1. Plot the history of the shares (open prices), their negative log-returns, and also a scatter-

plot of the two logreturn series. Comment.

Exercise 2. It is the 6th of October 2008. The open prices of the two shares are respectively CH22 and

CHF53.2 (for UBS and Credit Suisse, respectively). You decide to keep the portfolio till to- morrow
at least. Calculate the value at risk of your portfolio loss from today to tomorrow,
expected shortfall

ES0.99

V aR0.99

and the

using the following methods:

Variance-covariance method

Historical simulation method

Monte Carlo simulation method with Gaussian risk factors

Monte Carlo simulation method with student risk factors (use the function t.mst to t a multivariate t distribution)

For each method, calculate a 95% percentile bootstrap condence interval for the VaR and for the ES.
Draw and compare the dierent VaR estimators on the histogram of the historical loss data.
Exercise 3. It is the 7th of October 2008. The open prices of the two shares are respectively CHF21.68

and CHF54.05 (for UBS and Credit Suisse, respectively).

What was the real loss observed from the 6th to the 7th of October 2008? Compare to the risk
measures calculated under (Exercise 2).

You decide to keep the portfolio till tomorrow. Recalculate the risk measures of (Exercise 2) and
compare to the observed loss from the 7th to the 8th of October. What happened?

Exercise 4 (VaR of skewed loss distribution). Implement the methods in (b) over the

k = 400

most

recent trading days to calculate VaR estimates at the 95% and 99% levels, and use a backtesting
algorithm to compare their rela- tive performance. For each of the 400 estimates, use a window length
of

wl = 50

observations. Comment. Then use

wl = 500
1

and comment.