We’ve discussed the Value at Risk (VaR) statistics in APM before (link here). These are 1-day or 20-day values, that show how much your fund could lose in these periods, given normal conditions.
We also offer Stress-Test VaR statistics. These instead show how much you could lose under extreme conditions.
Standard VaR statistics require very little work from you – once you’ve provided one year’s worth of historical prices for your Product IDs, APM can generate the values itself (note that these are also required for Stress-Test VaR).
However, Stress-Test VaR values are different – you have a great deal of control.
You can choose which scenarios you wish to test your portfolio under, whether this is an Historical Scenario (e.g. 9/11), a Hypothetical Scenario (e.g. a future economic crash), or a simple upward or downward shift in prices, which we call Sensitivity Analysis.
These all work in a similar way – effectively, you pick a situation, and decide to move certain prices up or down, by a certain amount.
In all the above situations, you control the inputted scenario, but we have recommended values for historical scenarios based on the actual events, if you wish to use these.
How to generate these figures
First, you have to input a certain amount of information, including: Method(Historical, Hypothetical or Sensitivity Analysis), Percentage (how much prices change) Direction (whether prices move up or down) and Scenario.
You can then choose from a range of other information to specify what type of shock you’d like to run, including: Product Type, Currency, Exchange, Sector and Position Class.
For example, you could choose:
- Method – Historical
- Scenario – 9/11
- Product Type – EQ
- Fund Name – Fund 1
- Percentage – 30%
- Direction – Down
APM would then simulate a scenario where the current day price of all the EQ product IDs falls by 30%. The VaR statistics for the overall portfolio – so, how much each position could lose at a maximum over a 1-day or 20-day period – are then calculated.
Where you can see these figures
VaR and Stress-Test VaR reports are available in the Reports section.
However, these are not automatically available. Firstly, all prices for each product in the fund for the past year must be included. Then, Arbor needs to set these reports up – to get started using VaR, get in touch.
How the values are calculated & their exact interpretation
For more information on exactly how these VaR statistics are calculated, and what each value means, see the earlier Did You Know email.
For more detailed information, check out our VaR and Stress-Test VaR User Manuals.
And head here to learn more about our broader Risk Management System.