A Probabilistic Simulation Based VaR Computation and Sensitivity Analysis Method

TL;DR

This paper introduces a probabilistic simulation method called SAYO for faster and more realistic VaR computation and sensitivity analysis in investment risk management.

Contribution

It proposes a novel simulation-based VaR calculation technique and a sensitivity analysis method, improving speed and insight over traditional analytical approaches.

Findings

Faster VaR computation using SAYO simulation.

Enhanced sensitivity analysis for investment factors.

More realistic risk assessment compared to traditional methods.

Abstract

This paper presents a new method to compute VaR (value at risk) and perform corresponding variance based sensitivity analysis. VaR has a long history of being applied in stock price prediction and investment portfolio analysis. Traditional method, however, is mainly analytical, and has certain limitations. The VaR simulation, on the other hand, provides more realistic analysis but is very slow which affects the applications. This study proposes a new VaR computation method based on a probabilistic simulation technique called Simulation As You Operate (SAYO). It is always helpful to know the most influential factors in an investment, and thus a sensitivity analysis method based on SAYO is also introduced to enhance investment analysis.