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Monte Carlo Simulation Approach to Calculate Value at Risk: Application to WIG20 and MWIG40

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  • Pasieczna Aleksandra Helena

    (Wrocław University of Economics, Wrocław, Poland)

Abstract

This paper reports our estimates of the Value at Risk using Monte Carlo simulations for which we developed a computer program. Our approach involves obtaining Monte Carlo parameters by fitting real historical data of different periods to probability distributions. We applied the algorithm to the WIG20 and mWIG40 stock indices, and performed simulations for the Value at Risk at 95% and 99% confidence intervals over six estimation periods ranging from 1 trading day to 250 trading days. This approach was evaluated using the percentage failures and the Kupiec Proportion of Failures test. Our results indicate that this method is highly influenced by the choice of past historical and estimation period lengths considered. Overall, we observed that the Monte Carlo computational scheme is a reliable method for quantifying VaR when parametrized well.

Suggested Citation

  • Pasieczna Aleksandra Helena, 2019. "Monte Carlo Simulation Approach to Calculate Value at Risk: Application to WIG20 and MWIG40," Financial Sciences. Nauki o Finansach, Sciendo, vol. 24(2), pages 61-75, June.
    • Handle: RePEc:vrs:finsci:v:24:y:2019:i:2:p:61-75:n:5
    DOI: 10.15611/fins.2019.2.05
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    References listed on IDEAS

    as
    1. Savvides, Savvakis C., 1994. "Risk Analysis in Investment Appraisal," MPRA Paper 10035, University Library of Munich, Germany, revised 14 Aug 2008.
    2. Jérôme B. Detemple & Ren Garcia & Marcel Rindisbacher, 2003. "A Monte Carlo Method for Optimal Portfolios," Journal of Finance, American Finance Association, vol. 58(1), pages 401-446, February.
    3. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    Monte Carlo; Value at Risk; WIG20; mWIG40; Kupiec; simulations;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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