Probabilistic risk measures
The Acted notes (pg 15) that VaR can be calculated using 3 approaches: empirical (or historical), parametric and stochastic. Presume that Lam's 'Monte Carlo approach (page 216) is the same as the stochastic-simulation approach mentioned in Acted notes, although Lam omits the bootstrapping method.
Lam (page 217) also describes historical simulation as "uses historical data about actual price movements to generate scenarios, and then re-prices the portfolio according to these historical scenarios to generate the distribution of changes in portfolio value. Historical simulation is therefore similar to the Monte Carlo simulation approach, except that the changes in the risk factors are determined by historical experience, not chosen randomly."
Q1. Is Lam's historical simulation exactly the same as the empirical approach mentioned in Acted notes (even though the empirical description doesn't mention simulation and seems essentially to be a simple percentile of observed losses)? Or is it a more advanced version of the same thing.
Q2 Am I correct that both Practice Questions 14.6 and 14.9 are parametric approaches for VaR (Acted notes page 31-32) since they are assuming a normal distribution of losses and parameterising the expected annual volatility?
Q3: Are there empirical, parametric and stochastic approaches to calculating ruin probabilities? Or only for VaR, tVaR and expected shortfall?
Deterministic risk measures
Acted notes (pg 386) gives an example of the notional approach = risk weightings applied to the market value of assets and then compared to the value of liabilities in order to determine a notional (‘risk-adjusted’) financial position.
Q4: Under this approach would the liabilities also be discounted based on uncertainty -eg. lower discount rate for long-term, inflation linked liabilities in a foreign currency?
Acted notes (pg 387) defines "The factor sensitivity approach (ie sensitivity testing) determines the degree to which an organisation’s financial position (eg solvency or funding) is affected by the impact that a change in a single underlying risk factor (eg short-term interest rates) has on the value of assets and liabilities."
Q5: The Solvency II Standard formula includes factor sensitivities to calculate the VaR for certain risks such as equity (Acted notes Chapter 20 page 24). Would this be considered a deterministic VaR or are VaR measures always considered probabilistic?
Thanks in advance.
The Acted notes (pg 15) that VaR can be calculated using 3 approaches: empirical (or historical), parametric and stochastic. Presume that Lam's 'Monte Carlo approach (page 216) is the same as the stochastic-simulation approach mentioned in Acted notes, although Lam omits the bootstrapping method.
Lam (page 217) also describes historical simulation as "uses historical data about actual price movements to generate scenarios, and then re-prices the portfolio according to these historical scenarios to generate the distribution of changes in portfolio value. Historical simulation is therefore similar to the Monte Carlo simulation approach, except that the changes in the risk factors are determined by historical experience, not chosen randomly."
Q1. Is Lam's historical simulation exactly the same as the empirical approach mentioned in Acted notes (even though the empirical description doesn't mention simulation and seems essentially to be a simple percentile of observed losses)? Or is it a more advanced version of the same thing.
Q2 Am I correct that both Practice Questions 14.6 and 14.9 are parametric approaches for VaR (Acted notes page 31-32) since they are assuming a normal distribution of losses and parameterising the expected annual volatility?
Q3: Are there empirical, parametric and stochastic approaches to calculating ruin probabilities? Or only for VaR, tVaR and expected shortfall?
Deterministic risk measures
Acted notes (pg 386) gives an example of the notional approach = risk weightings applied to the market value of assets and then compared to the value of liabilities in order to determine a notional (‘risk-adjusted’) financial position.
Q4: Under this approach would the liabilities also be discounted based on uncertainty -eg. lower discount rate for long-term, inflation linked liabilities in a foreign currency?
Acted notes (pg 387) defines "The factor sensitivity approach (ie sensitivity testing) determines the degree to which an organisation’s financial position (eg solvency or funding) is affected by the impact that a change in a single underlying risk factor (eg short-term interest rates) has on the value of assets and liabilities."
Q5: The Solvency II Standard formula includes factor sensitivities to calculate the VaR for certain risks such as equity (Acted notes Chapter 20 page 24). Would this be considered a deterministic VaR or are VaR measures always considered probabilistic?
Thanks in advance.
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