Question

14.23 The calculations in Section 14.3 assume that the investments in the DJIA, FTSE 100, CAC 40, and Nikkei 225 are $4 million, $3 million, $1 million, and$2million,respectively.How do the VaR and ES  change if the investments are $3 million, $3 million, $1 million, and $3 million, respectively? Carry out calculations when (a) volatilities and correlations are estimated using the equally weighted model and (b) when they are estimated using the EWMA model. What is the effect of changing λ from 0.94 to 0.90 in the EWMA calculations? Use the attached spreadsheets data for your calculation.

Answer 1

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Answer:

a. We use the Excel workbook provided by the author to calculate the VaR for this problem. The values we modify are the amounts that are invested in each index, which are the alphas, which are in the thousands, in this case. Changing all the alphas to their respective amounts:

b. Now, we try the same with the EWMA worksheet to find the VaR, keeping lambda at 0.94:

Now, we set lambda to 0.90 and recalculate the VaR using the EWMA method:

We get a one day 99% VaR of $500,402.53 using the EWMA method and a lambda of 0.90.

We get a one day 99% VaR of $447,403.96 using the EWMA method and a lambda of 0.94.

We get a one day 99% VaR of $215,007.40 using the Equal Weights method.