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Quantitative Finance by Matt Davison

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Chapter 17

Value at Risk

17.1 CHAPTER SUMMARY

In Chapters 2 and 3 of this book, we discussed the idea of making decisions incorporating the worst-case scenario. We agreed that for most realistic problems, the worst-case scenario was so dire as to paralyze action. The value at risk (VaR) measure is a way of dealing with a worst-ish-case scenario. Many big books and thousands of papers have been written on VaR—in this chapter, we simply scratch the surface of this field. In this short chapter, we give a description of VaR, we simulate it, and we show some problems with it.

17.2 Introduction to Value at Risk

Earlier in this book, we discussed several ways to measure the risk of financial assets. For defaultable bonds, a useful measure of risk was ...

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