Method and device for calculating value at risk
First Claim
1. A method of determining the risk in possessing a portfolio having a portfolio price and a portfolio return, the portfolio including holdings each having a holding return, the holdings having been mapped to risk factors for which the parameters of a multivariate normal statistical distribution have been determined, the method including:
- expressing each holding return as a quadratic form in the returns of the risk factors;
aggregating the quadratic forms in the holdings to obtain a quadratic form approximation for the portfolio;
determining a cumulant generating function of the quadratic form in the portfolio return and the first and second derivatives of the cumulant generating function;
inputting the cumulant generating function and the derivatives into a saddlepoint approximation of first order or higher order from which the statistical distribution function of the portfolio return is provided, and providing a Value at Risk quantity from a tail area of the statistical distribution function of the portfolio return.
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Abstract
The invention is a method and system for determining VaR. The invention does not require Monte Carlo sampling. Alternatively, if Monte Carlo sampling is used, it requires only a reduced number of such trials. The invention is based on reducing the pricing function of the overall portfolio to a delta-gamma approximaiton, which in effect is a quadratic form in the risk factors; the distribution of the risk factors is, in turn, assumed to be a known multivariate normal distribution; the distribution of this quadratic form in normal variables is then determined by means of first evaluating the moment generating function (Laplace transform) of this distribution, and then applying highlt accurate methods of saddlepoint approximation to this moment generating function to determine the distribution and its quantiles.
88 Citations
88 Claims
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1. A method of determining the risk in possessing a portfolio having a portfolio price and a portfolio return, the portfolio including holdings each having a holding return, the holdings having been mapped to risk factors for which the parameters of a multivariate normal statistical distribution have been determined, the method including:
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expressing each holding return as a quadratic form in the returns of the risk factors;
aggregating the quadratic forms in the holdings to obtain a quadratic form approximation for the portfolio;
determining a cumulant generating function of the quadratic form in the portfolio return and the first and second derivatives of the cumulant generating function;
inputting the cumulant generating function and the derivatives into a saddlepoint approximation of first order or higher order from which the statistical distribution function of the portfolio return is provided, and providing a Value at Risk quantity from a tail area of the statistical distribution function of the portfolio return. - View Dependent Claims (2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14)
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15. A system for determining the risk in possessing a portfolio having a portfolio return and a portfolio price, the portfolio including holdings each having a holding return the holdings having been mapped to risk factors (i) for which the multivariate normal distribution has been determined or (ii) for which the parameters of a discrete or continuous mixture of multivariate normal distributions has been determined, the method including:
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a) means for expressing each holding return as a quadratic form in the returns of the risk factors;
b) means for aggregating the quadratic forms in the holdings to obtain a quadratic form approximation for the overall portfolio;
c) means for determining a cumulant generating function of the quadratic form in the portfolio return and the first and second derivatives of the cumulant generating function; and
d) means for inputting the cumulant generating function and the derivatives into a saddlepoint approximation of first order or higher order from which the statistical distribution function of the portfolio return is provided, wherein a Value at Risk quantity can be provided from a tail area of the statistical distribution function of the portfolio return. - View Dependent Claims (16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28)
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29. A method of determining the risk in possessing a portfolio having a portfolio return and a portfolio price, the portfolio including holdings each having a holding return, the holdings having been mapped to risk factors for which the parameters of a discrete or continuous mixture of multivariate normal distributions has been determined, the method including:
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expressing each holding return as a quadratic form in the returns of the risk factors;
aggregating the quadratic forms in the holdings to obtain a quadratic form approximation for the portfolio;
determining a cumulant generating function of the quadratic form in the portfolio return and the first and second derivatives of the cumulant generating function;
inputting the cumulant generating function and the derivatives into a saddlepoint approximation of first order or higher order from which the statistical distribution function of the portfolio return is provided, and providing a Value at Risk quantity from a tail area of the statistical distribution function of the portfolio return. - View Dependent Claims (30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43)
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44. A method of determining the risk in possessing a portfolio having a portfolio return, the portfolio including holdings each having a holding return, the holdings having been mapped to risk factors for which the parameters of a multivariate normal statistical distribution have been determined, the method including:
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expressing each holding return as an expanded polynomial of the third or higher order in the returns of the risk factors;
aggregating the multivariate polynomials for the holdings to obtain a multivariate form approximation for the portfolio return;
determining a predetermined number of the first cumulants of the expanded polynomial;
determining a cumulant generating function of the expanded polynomial in the portfolio return using the first cumulants;
determining the first and second derivatives of the cumulant generating function;
inputting the cumulant generating function and first and second derivatives into a saddlepoint approximation of first order or higher order from which the statistical distribution function of the portfolio return is provided, and providing a Value at Risk quantity from a tail area of the statistical distribution function of the portfolio return. - View Dependent Claims (45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66)
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67. A system of determining the risk in possessing a portfolio having a portfolio return, the portfolio including holdings each having a holding return, the holdings having been mapped to risk factors for which the parameters of a multivariate normal statistical distribution have been determined, the system including:
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means for expressing each holding return as an expanded polynomial of the third or higher order in the returns of the risk factors;
means for aggregating the multivariate polynomials for the holdings to obtain a multivariate form approximation for the portfolio return;
means for determining a pre-determined number of the first cumulants of the expanded polynomial;
means for determining a cumulant generating function of the expanded polynomial in the portfolio return using the first cumulants;
means for determining the first and second derivatives of the cumulant generating function;
means for inputting the cumulant generating function and first and second derivatives into a saddlepoint approximation of first order or higher order from which the statistical distribution function of the portfolio return is provided, and means for providing a Value at Risk quantity from a tail area of the statistical distribution function of the portfolio return. - View Dependent Claims (68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88)
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Specification