Market Risk Analysis
Overview
The task you are given is to estimate the market risk for a hypothetical holding of 1,000,000 WBC shares, held on March 3, 2022 (you are working out the risk position assuming that you own these shares at the open of trading that day).
You will do this by estimating the Value-at-Risk for the stock using historical data.
You will be asked to calculate the following;
– 10 day VaR for the portfolio of shares at a confidence level of 99%.
Note: This risk estimate applies to the next 10 trading days from March 4, 2022 until March 17, 2022 (i.e. – it should be a forecast of risk).
you realized that you have several options for how to compute this risk measure. You are considering using a VaR based on
a) the normal distribution using a 250-day rolling window,
b) the normal distribution using a 63-day rolling window,
c) the normal distribution using the EWMA (lambda = 0.94),
d) historical simulation based on a window of 250 days, or
e) historical simulation based on a window of 63 days.
To aid in the decision of which to use, you are going to consider the recent historical performance of the five models in calculating 1 day VaR at the confidence level of 99%. You will do so by first examining the frequency of instances when the VaR was exceeded by the observed return using the last five years of data.
You will then evaluate the appropriateness of these frequencies over time relative to the Basel traffic light levels discussed in lectures. Based on this performance, and any other factors you want to discuss, select the best model and report the required VaR(10, 99%) for March 3, 2022.
