Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Market risk computation for nonlinear portfolios
Gerold Studer
Abstract
ABSTRACT
Maximum loss is introduced as a method for analyzing the market risk of portfolios by identifying the worst case in a given set of scenarios, called the 'trust region'. After discussing some important relationships between maximum loss and value-at-risk, a technique for the maximum loss computation for quadratic functions is described. The repetitive application of this technique to growing trust regions leads to a sequence of worst case scenarios which form a complete path. The approximation of arbitrary profit and loss functions by a sequence of quadratic functions allows the efficient analysis of nonquadratic portfolios.
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