Media Practical Application of Risk Management

Practical Application of Risk Management

uploaded October 10, 2022 Views: 92 Comments: 0 Favorite: 2 CPD

Financial firms (and their regulators) often need estimates of portfolio values or of risk measures such as Value-at-risk (VaR), expected shortfall, …

  • Sometimes can be calculated analytically but more usually larger players need to use simulation techniques (and possibly proxy models). Similar picture in non-financial field.
  • Traditional workhorse: Monte Carlo simulation
  • Basic form: (equally probable) simulations drawn randomly from relevant probability distribution characterising economic drivers impacting the portfolio payoff value
  • Accuracy typically improves only at best in proportion to square root of number of simulations
  • For large / complex books (especially with nested calculations), runtimes can be excessive to obtain an adequately low level of error
  • Risk management (VaR-type) calculations particularly challenging as often include nesting.


Categories: AFIR / ERM / RISK
Content groups:  content2022


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