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VAR
ESTIMATION
Husam Sawalha
Leen Bargouth
Muna Ghosheh
Flora Mansour
INTRODUCTION
INTRODUCTION
Value of investment
AHLI
4000
JO CEMENT
3000
JO POULTARY
2000
JO DAIRY
1000
Total
10,000
INTRODUCTION
Approach.
Historical Simulation Approach :
Model-Building
Equal-Weights
EWMA
Approach :
METHODOLOGY OF WORK
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
HISTORICAL SIMULATION
APPROACH
Basic
Historical Simulation:
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
This
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
vi 1 (vi vi 1 ) n 1 / i
vi 1
MODEL-BUILDING APPROACH
The
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
Then
2
P
cov
i 1
j 1
ij
i j
Firstly,
Secondly,
using
Finally,
Then