Cracking VAR with kernels

Eduardo Epperlein and Alan Smillie
01 Aug 2006

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The notion of component value-at-risk (CVAR) originated in the papers of Garman (1996, 1997) and Litterman (1997a, 1997b), and has been used by banks as a practical risk analysis tool since at least Epperlein & Sondhi (1997). The goal is to calculate how much some component of a portfolio contributes to the total VAR of that portfolio. We denote the profit and loss (P&L) of the portfolio as PL and the P&L of the ith component as PLi, so that:

- from a simulated sample. If we are willing to

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