VAR increases or decreases question question

LPoulin133

This is 2010 Mock PM Case 3:



1. A change from 95% confidence level VAR to 99%, would provide a _______ VAR estimate?
higher? lower?


2. A change from daily VAR to monthly VAR, the VAR estimate would ________?
increase? decrease?

According to guideline answer:
Question 1, lower;question 2 increase.


And:
Using a 95% confidence level, the portfolio has an average daily VAR of $1ml.

Statement: the VAR represents a maximum loss that will not be exceeded. True/false?

My opinion: when VAR comes with 5%, it is minimum loss; when comes with 95%, though same amount, it is maximum loss. Am I correct?

Unforseen

I'm talking about absolute values here, you guys are over analyzing.

NO EXCUSES

susana

bpdulog, I don't agree

VAR gives you the MINIMUM expected loss given a certain period and %confidence level, loss can alway be higher than stated VAR

as the confidence level increases, so does the expected loss

as the period (days -> weeks -> months ->....) increases, so does VAR

both is logical and easy to remember, as the very highest loss (with either method) is @100% and you get closer if you move towards this

...and of course you would expect to get to this highest loss more probable in the next 10 years then by next tuesday

re negative and positive values: the thingie is calle "Value at risk", so it must be a positive number ($$$ or % @risk)

otherwise, it would be called "gain at risk" (which would be negative) ;-)

of course, if you develop VAR from historical figures f.e., you look at negative numbers, but the VAR would still be stated positively

Unforseen

it depends on the wording. The example given was not precise enough. VAR will increase in MAGNITUDE if you lower the probability. In other words, the lower the probability the higher the expected loss.

liangfeng

Just picture a normal distribution.

We're looking at the left tail of this distribution.

95% - there's 5% to the left of the VAR number. (say the VAR number = -1,000,000)

99% - there's 1% to the left of the VAR number. (say the VAR number = -1,500,000)

What does that mean? The 99% VAR occurs further in the tail i.e. it's lower in numeric terms.

But VAR tells you about the maximum loss at a given % confidence so for 95%, your maximum loss is 1m but for 99%, your max loss is 1.5m.

HENCE, higher VAR for higher confidence level.

cityboy

CFAtime - will it always be negative?

now i'm starting to get scared about this. cant be sure of any answer!

Iginla2011

The actual number will be more negative (i.e. less) but VAR is measured as a loss number so a lower number indicates a greater loss and hence a higher VAR.

Darien

jin,

unless they ask about magnitude, don't worry about it IMO.

Zestt

niraj_a Wrote:
-------------------------------------------------------
> 1) VAR = Rp - z * Std dev
>
> If confidence interval increases from 95% to 99%,
> then the z score increases from 1.65 to 2.3.
>
> This VAR decreases. Thats correct right?


That's actually my question.
-The value of the VAR decreases.
-The magnitude of the VAR increases.

So if question simply ask about VAR, shall I say increase? or decrease? Higher? or Lower?

strikethree

Agree...

1. Higher
2. Increase
3. True - assuming that question is asked in context of a previous stmt which does have 95% prob stated