Worse fluctuation method for fast Value-at-Risk estimates

TL;DR

This paper introduces a novel method leveraging the non-Gaussian fluctuation characteristics of financial assets to efficiently compute fast and reliable Value-at-Risk estimates for complex portfolios, accounting for rare events.

Contribution

It presents a new approach that simplifies VaR calculation by exploiting non-Gaussian fluctuations, enabling quick and accurate risk assessment of large portfolios.

Findings

Enables fast VaR and ΔVaR estimation for large portfolios.

Accounts reliably for rare events in risk calculations.

Simplifies complex portfolio risk assessment.

Abstract

We show how one can actually take advantage of the strongly non-Gaussian nature of the fluctuations of financial assets to simplify the calculation of the Value-at-Risk of complex non linear portfolios. The resulting equations are not hard to solve numerically, and should allow fast VaR and $\Delta$VaR estimates of large portfolios, where {\it by construction} the influence of rare events is taken into account reliably. Our method can be seen as a correctly probabilized `scenario' calculation (or `stress-testing').