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Monte Carlo VaR

Learn more about Monte Carlo VaR

The Monte Carlo VaR is a method of calculating VaR that is based on a stochastic simulation of the returns of a portfolio or asset. It allows for the consideration of non-normal return distributions and market stress scenarios.

To calculate VaR Monte Carlo, we start by specifying a mathematical model that describes the dynamics of the asset or portfolio prices, using random variables to model uncertainties. We then simulate a large number of possible price trajectories using simulation techniques.

Next, for each simulated trajectory, we calculate the corresponding loss for a certain level of confidence. Finally, we calculate the VaR by choosing the maximum loss observed in a certain percentage of simulated trajectories, such as the 1% worst case scenarios.

VaR Monte Carlo is often considered the most accurate method for calculating VaR, as it allows for the consideration of non-normal distributions and risks related to extreme events. However, it can be more complex to implement and requires detailed historical data to estimate the model parameters.

Example Monte Carlo VaR charts

More info : Investopedia

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