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Jan 21, 2015

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risk management

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risk management

© All Rights Reserved

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VAR

ESTIMATION

Husam Sawalha

Leen Bargouth

Muna Ghosheh

Flora Mansour

INTRODUCTION

from Amman stock exchange :

The Jordan Cement Factories.

Jordan Poultry Processing & Marketing.

Jordan Diary.

most recent 501 days

INTRODUCTION

as follow :

Our Companies

Value of investment

AHLI

4000

JO CEMENT

3000

JO POULTARY

2000

JO DAIRY

1000

Total

10,000

INTRODUCTION

following approaches:

Standard

Approach.

Historical Simulation Approach :

Model-Building

Equal-Weights

EWMA

Approach :

METHODOLOGY OF WORK

to ensure returns are normally distributed, so that no

out layer number that may effect our estimation of VaR

.

Secondly, VaR was estimated based on standard

approach.

Thirdly, under the Historical Simulation Approach, 500

alternative scenarios was built based on 501 returns of

stocks, to estimate the probability distribution of the

change in the value of the current portfolio

Finally, under the Model-Building Approach, the

covariance matrix between stocks returns was built

and used in estimation.

NORMALITY TEST

All portfolio stocks returns are normally

distributed or semi normally.

The descriptive analysis of returns was made,

and the values of Kurtosis and Skewness was

checked as follow:

Skewness

Kurtosis

Stock

0.304856

8.884672

AHLI

-0.331869

0.617962

JOCM

0.591727

1.772698

JPPC

-0.189063

3.460736

JODA

STANDARD APPROACH

Based

mean and standard deviation was

calculated.

The following formula was used to

estimate VaR :

VaR N 1 ( X )

HISTORICAL SIMULATION

APPROACH

Basic

Historical Simulation:

VaR is based on historical scenarios of losses .we collect the historical data on their

returns over a set observation period Each scenario -or day outcome- is given equal

weight, which is 1/number of scenarios .

for each asset and each t in the observation period, we generate scenarios by

calculating the return (% change) on each of the assets. Here is the formula to

calculate the percentage price changes: (price t - price t-1) / price t-1 or (ln t) .

For 500 scenarios , the one-day 99% VaR can be estimated as the fifth-worst loss.

no of observations=500, 1-.99=10% ,10%*500=5

Then we find mean and standard deviation and according to the equation:

Mean-Z(n)*standard deviation

Wefind the historical var

HISTORICAL SIMULATION

APPROACH

We suggest that more recent observations should be given more weights because they

are more reflective of current volatilities and current macroeconomic conditions .

We calculate the weights by choosing lambda = 0.94

n-i (1- )

1- n

Where

n: number of observation .

i : scenario number,

i=1 is the scenario that calculated from the most distant data.

: can be chosen by experimenting to see which value back-test best .

As approaches 1, the relative weights are approach the equal weight.

Then we do a cumulative weight column for our weights

Starting at the most worst observation sum weight until the required quintile of

distribution is reached( we are calculating VaR with 99% confidence level) , so we

continue summing weight until the cumulative weight is just greater that 0.01 .

SIMULATION VOLATILITY-ADJUSTED

APPROACH (EWMA)

In

was taken into consideration .

This

estimation that incorporate the

volatility of current information

PROCEDURE OF VOLATILITY

ESTIMATION USING EWMA

Calculate

daily variance

The following equation used to produce new variance

2n 2n 1 (1 )u n21

Then we find standard deviation which is the

Square root of variance

Then we make volatility multiplier:

Last sd/1st sd, last sd/2nd sd

Then we multiply volatility*losses

Var=1-95%=5% we will find the 5th loss from the

bottom

assumed to be .94

formula :

vn

vi 1 (vi vi 1 ) n 1 / i

vi 1

MODEL-BUILDING APPROACH

The

simulation is to make assumptions

about the probability distributions of

the returns on the market variables

is known as the model

building approach (or sometimes

the variance-covariance approach).

This

MODEL-BUILDING APPROACH

Daily changes in the value of a portfolio equal the

total daily changes in the values of individual

stocks.

This approach based on the assumption that daily

changes of the values of individual stocks are

normally distributed and so daily changes in the

value of the portfolio are normally distributed.

The variance of the daily changes of portfolio value

is given by:

cov ij i j

2

P

i 1 j 1

IN MODEL-BUILDING APPROACH

Calculate

Based on the following equation, the

variance of portfolio is calculated

Then

2

P

cov

i 1

j 1

ij

i j

Instead

weighted average method with certain value could

be used.

Firstly,

using

Secondly,

using

Finally,

calculate portfolio variance

Then

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