To VaR, or Not to VaR, That is the Question

Olkhov, Victor (2021): To VaR, or Not to VaR, That is the Question.

Abstract

We consider the core problems of the conventional value-at-risk (VaR) based on the price probability determined by frequencies of trades at a price p during an averaging time interval Δ. To protect investors from risks of market price change, VaR should use price probability determined by the market trade time-series. To match the market stochasticity we introduce the new market-based price probability measure entirely determined by probabilities of random market time-series of the trade value and volume. The distinctions between the market-based and frequency-based price probabilities result different assessments of VaR and thus can cause excess losses. Predictions of the market-based price probability at horizon T equals the forecasts of the market trade value and volume probability measures.

• Item Type: MPRA Paper
• Language: English
• Keywords: value-at-risk; risk measure; price probability; market trades
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D46 - Value Theory; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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