PORT VaR

Seminar
Robert Crampton
Series 1
02/27/2015

Agenda
What is VaR
How is VaR computed on PORT<go>
Different VaR Methodologies used on
PORT<go>
Analyzing VaR on PORT<go>
Settings
VaR Comparison
VaR Terminology

Factor Breakdown
Monte Carlo/Historical VaR Simulation

VaR on the Optimizer

Generating a VaR report

What is VaR
VaR measures the maximum dollar loss projected
given inputs for the time horizon and confidence level.
VaR can be measured on the portfolio, benchmark, or
active/difference portfolio.
Based on a distribution of returns, whether historical
or derived via a simulation, we can find the specified
dollar value ranges.
PORT calculates VaR based on three different percentile
ranges:

97.5
95%
99%
%

I am 95% confident that I can lose at most $VaR in a

given horizon period

VaR Methodologies on
PORT
Five types of VaR are provided on the PORT<go>
system in Bloomberg, each model utilizes the
Bloomberg Multi-Factor Risk Model in order to
keep VaR consistent with Tracking Error data
You can choose which Factor Model to use while
calculating VaR through your PORT settings

Parametric
VaR
Historical 1y
VaR
Historical 2y
VaR
Historical 3y
VaR
Monte Carlo
VaR

Parametric VaR
Assumes factor returns and non-factor returns are
normally distributed
We first model each factor, and assume each of these has
returns are normally distributed.
We next look at our exposures to each of these factors.
Each factor will have different exposures calculations.
HINT!: To see the exposures to each of the factors, we can
look in the Tracking Error tab on PORT. The factors sub tab is
going to show us our portfolios exposure to the said factor
model.

Using the selected factor model we can model a normal

distribution of portfolio returns and a standard deviation
value.
95%: -1.645*SD
97.5%: : 1.96*SD
99%: 2.33*SD

Parametric VaR
Benefits /
Drawbacks with
Simplest of all three
Parametric
VaR
of the
methodologies.
Underestimates VaR
since returns are
usually
fat tailed
Used for linear
securities
since we assume
normal
distribution we are
fully
dependent on linear
factor model

Historical VaR
Historical VaR builds on Parametric VaR, as it does not
assume a normal distribution for all of the factor returns.
We build a distribution of factor returns based on the
historical performance of those factors.
Given historical factor returns and current portfolio
exposures, (again, seen on the Tracking Error tab) we can
model the corresponding returns for all securities in a
portfolio and aggregate these returns on the portfolio level.
Given the aggregated portfolio returns we create a historical
distribution of said returns and compute the desired
percentile of the distribution for VaR
PMs currently have the choice to use 1-3 years of factor
return history on PORT<go> for historical VaR.
Thus, we allow for flexibility on how to construct the
distribution of historical factor returns.

Monte Carlo VaR

Rather than using historical factor returns to
predict future portfolio movements, we are
creating a forward looking distribution of returns
by generating possible simulations
Due to the use of 10,000 different simulations used
(compared to 1, 2, 3 years of daily history) Monte
Carlo has a higher statistical accuracy than historical
Bloomberg pulls simulations from a joint distribution
of factor and non factor returns
Bloomberg runs 10, 000 different simulations
We can find these on the VaR simulations subtab

VaR for Nonlinear

Securities
Unlike parametric VaR, historical and monte carlo models allow
computation for non-linear securities since both models use
actual simulations rather than assuming normal distribution
Currently we use 3 pricing models to capture security nonlinearity:
Delta/Gamma approximation
Use delta/gamma and duration/convexity factors based on selected model

Full Valuation
Used for securities with highly non-linear pricing
Use actual realized prices for each simulation
This is computationally demanding and cannot be realistically
implemented for a multi-asset risk system that updates daily. To expedite
the computation while faithfully representing the risk profiles of nonlinear
instruments, many methods have been developed such as stress matrix
pricing below.

SMP
The basic idea of stress matrix pricing (SMP) is to compute full valuation
on a low dimensional grid. The scenario P&L is then approximated by
interpolating on the grid during simulation.

VaR Methodology

VaR-Main View

VaR-Main View
Customization

VaR-Settings
Settings
effect your
Distribution
and Factor
Breakdown
sub tabs
Remember
that your VaR
value is
effected by
the risk
model you
have loaded

VaR-Main View
VaR %

Compone
nt VaR

VaR as a percent of Market Value

(135,666.75/4,547,135.50)*100
=2.98%

Measures the change in VaR if that

security or grouping was removed
from the portfolio
This will sum to overall VaR

VaR-Main View
VaR %
Contributio
n

VaR Ratio

Measures the percent contribution to

the portfolios total VaR
=component VaR/Total VaR
2359.28/49,193.3=4.8%

Ratio of Portfolio VaR to Benchmark

VaR, a ratio of 2 would show that the
loss of your portfolio is twice as large
as that of the benchmark
49,193.3/176,852.1=.28

VaR Comparison

VaR Comparison
Marginal
VaR

Based on your units, the impact on portfolio VaR

given a 1% increase or $100 increase in the position
of the security or group
Ex: Given a portfolio VaR of 226666.95 and a position of
300,000 in FHR 3423 PB. My Marginal VaR is 1.76. When I
increase my position to 300,100 my portfolio VaR becomes
226668.7=226666.95+1.76

Partial
VaR

Measures your change in portfolio VaR if you

completely remove your exposure to a security or
grouping. Again this is based on your default units
Ex: Given a portfolio VaR of 226666.95 and a position of
300,000 in FHR 3423 PB. My Partial VaR is -6,692.69. When I
remove my position my portfolio VaR becomes
219974.26=226666.95-6692.69

Condition
al VaR

Also known as Expected Shortfall, Measures the

expected loss in the underlying currency of the
portfolio when the confidence level is surpassed. Per
market convention this is the average of P&L
generated for the tail beyond the confidence interval
The higher the confidence level, the higher the average of
the tail and therefore the greater the conditional VaR

VaR Distribution

VaR Simulations

VaR Factor Breakdown

Optimizing Using VaR

My exposure
to EUR 10Y
KRR is
contributing
23.96% to
my VaR

BEFORE I
Decrease my
Exposure

Optimizing Using VaR

My
Optimization

AFTER I
Decrease my
Exposure

Optimize Using VaR

Custom Reporting
ActionsCreate/Edit TemplatesVaR
Choose PDF or Excel
Choose the Subtabs you are interested in
Create charts based on Main View subtab

Custom Reporting

Custom Reporting

THANK YOU!