Valuation and Risk
Market Risk
Measuring and testing market risk with sensitivities, VaR, expected shortfall, stress tests and backtesting.
Introductory1 pagePractitioner4 pages
1Measuring Risk
- PractitionerSensitivities: DV01, Vega and Key Rate SensitivitiesRisk factors depend on the product, and each maturity's interest rate is treated as a separate risk factor.
- IntroductoryValue at Risk (VaR)VaR at a 99% confidence level is the amount that losses exceed with a probability of 1%.
- PractitionerExpected ShortfallEven with the same VaR, a position with larger losses beyond VaR has a larger expected shortfall.
2Validation and Regulation
- PractitionerStress TestingVaR is based on past data and cannot show environment changes or tail losses, so stress testing fills the gap.
- PractitionerBacktestingVaR is an estimate that can be wrong, so each day's VaR is compared with the next business day's profit or loss and the exceptions over the most recent 250 business days are counted.