Financial Risk Management DERIVATIVES

Question 1: VaR, VCV & SIM

You can use US stocks or UK stocks in the following. 

Obtain (recent, eg. 1000 or more days) of daily stock price data on 3 US stocks (A-C) from different sectors (e.g. retail or financial, or energy, etc). Assume you hold $100,000, $90,000 and $80,000 in each stock, respectively. 

a) Use the sample standard deviation and sample correlation coefficients to calculate the 5-day VaR (5th percentile) using the VCV method and compare this with the Single Index Model approach (VCV-SIM). Briefly comment. 

b) 
– Use the VCV-SIM model and the EWMA approach (with the “weighting ” factor, =0.97) to assess the accuracy of the 1-day VaR forecast (at the 5th percentile), over a chosen data sample. 
– Briefly state changes required to assess the avone VaR forecast over 5 days.

Historical Simulation and Bootstrap 
c) Compare the accuracy of the daily-VaR (5th percentile) of your portfolio from the VCV-SIM-EWMA approach (above) with the historical simulation approach. Briefly comment. 

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