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arXiv · 0811.2691

Value-at-Risk Computation by Fourier Inversion with Explicit Error Bounds

Johannes Vitalis Siven·Jeffrey Todd Lins·Anna Szymkowiak-Have
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Abstract

The value-at-risk of a delta-gamma approximated derivatives portfolio can be computed by numerical integration of the characteristic function. However, while the choice of parameters in any numerical integration scheme is paramount, in practice it often relies on ad hoc procedures of trial and error. For normal and multivariate $t$-distributed risk factors, we show how to calculate the necessary parameters for one particular integration scheme as a function of the data (the distribution of risk factors, and delta and gamma) \emph{in order to satisfy a given error tolerance}. This allows for implementation in a fully automated risk management system. We also demonstrate in simulations that the method is significantly faster than the Monte Carlo method, for a given error tolerance.

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Johannes Vitalis Siven, Jeffrey Todd Lins, Anna Szymkowiak-Have. 2008-11-17. Value-at-Risk Computation by Fourier Inversion with Explicit Error Bounds. https://arxiv.org/abs/0811.2691

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