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Value at Risk - VaR

On this web page you will find an example for the value at risk (VaR) calculations for our market timing systems composite portfolio (= a portfolio consisting of all of our stock and bond market trading systems).

The value at risk (VaR) indicates the maximum percentage value of our composite trading systems portfolio that could be lost during a fixed period (e.g.: one day) within a certain confidence level (e.g.: 95%).

In recent years the VaR-concept has become a heavily used Risk Management tool and also an important method for setting capital requirements for banks. One of the main advantages of the VaR-method is, that it works across different asset classes such as stocks and bonds. Traditionally there are different risk measurements, such as duration for fixed income and the beta-factor for equities. Now with the VaR-method it is possible to measure the aggregated risk on a portfolio level.

But it is also very important to understand the underlying assumptions and limitations of the VaR-model (e.g.: stable VaR measurements could only be achieved under normal market conditions, "tail risk", ...).

There are three approaches to calculate a VaR:
  • Variance-covariance-approach: analytical estimation of the volatility of asset returns and of the correlations between these asset price movements
  • Monte Carlo simulation
  • Historical simulation
Our daily VaR estimates (= one day estimation, 95% confidence level, one year look-back-period) are based on the variance-covariance approach and on historical simulations. Currently we are not incorporating the Monte Carlo Simulation approach for estimating the VaR of our bond and stock trading systems.

Example for a daily VaR - indication


IMPORTANT: The VaR indication is not intended to provide personal investment advice. The VaR indication has been prepared solely for guidance and informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading or market timing strategy.
The VaR indication is based on simulated trading and therefore it is not intended to represent any actual performance. Simulated performance results contain inherent limitations. Unlike actual performance records the simulation results may under or over compensate for such factors such as lack of liquidity.
The VaR indication does not provide, imply, or otherwise constitute a guarantee of performance. Therefore it should not be assumed that future VaR indications will be profitable or will equal past performance, real, indicated or implied. Past performance is not necessarily indicative of future results.
The information contained on this web page has been compiled from sources deemed reliable and it is accurate to the best of our knowledge and belief; however, we cannot guarantee as to its accuracy, completeness and validity and cannot be held liable for any errors or omissions.
Please also read our detailed important disclaimer.

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