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Hello. Welcome to this first tutorial to help you use the ValueAtRisk tool. The App starts out rather minimal, but is filled with Graphics and Data later. Your positions are retrieved automatically, so no need to enter them again. There are just 2 options to select – or you can initially keep to the defaults.
The first options to choose is Bar (Hours). This is the size of Bar in Hours and becomes the basic unit that the analysis will use. Next is Num Bars. This tells the analysis how many bars to use looking back from now. The longer this period, the more representative the results are. Now, press the Analyse button
You might have to wait for the data for a little while. The App makes sure that it has consistent data and matches bars across all symbols carefully. Any gaps in the data are ignored, except for the gap between late Friday and early afternoon on Sunday. However, poor source data will affect the results – so it is worth checking with the broker. Here it comes…
Two graphs and a data panel are displayed. Let’s look at the Distribution Graph. This shows the distribution of Bar Profits (and Losses), with a frequency count on the left. It gives a good idea of what Pnl movements you may experience over the course of a bar. The extreme left shows the worst bar. The Panel below tells you where the Std, 5% VaR and 1% VaR levels are. Std 1% VaR 5% Var
The lower graph shows the Bar Profits ( and Losses) ordered by size, with the greatest losses on the left. 95th Percentile This graph is useful for looking at the Profits in percentile terms. The Panel above tells you where the 95th percentile level is. The far left highlights the worst few bars.
Lastly, let’s look at the data on the Panel. All data relates to the timeseries of Bars selected. Each Bars represents the aggregate Profit change experienced by all positions held – in USD terms. Mean. The average Profit of the bars. Std. The standard deviation of the bars. Bar VaR 5%. This is the 95% confidence level “Value At Risk”. This means you have a 5% chance of experiencing a loss greater than this number. Bar VaR1%. This is the 99% confidence level “Value At Risk”. This means you have a 1% chance of experiencing a loss greater than this number. Bar Perc 95. This is the 95th percentile of the ordered bars. This is an alternative way to estimate the excess loss with a 5% chance. Daily VaR 5%. This number has been scaled up from the bar values to give an estimate for your Daily VaR. Again, it shows the 5% probability of a loss greater than this number on a daily basis. Worst Bar, 5 Bars, 10 Bars. This is a simple aggregate of the worst losing periods of consecutive bars. Key Driver. This shows which position has the greatest impact on the current level of risk.
Summary This tool and the analysis it produces is an attempt to bring methods used by the institutional trading houses to a wider community of traders. Novium Research is creating professional tools for all traders. VaR is a useful metric in that it attempts to give an overview of the inherent risk. However, it is only an estimate and should be used purely as reference alongside other methods of evaluating risk. It can be illuminating to see the effect of aggregating risk from all current positions – or when considering a hedge with the Hedge Tool. Any attempt to quantify risk runs into difficult areas, and this tool is no exception. For a witty, but also incisive look at modern approaches to measuring risk, we recommend the work of NassimTaleb (see last link). The following links may help to explain VaR in more detail: http://en.wikipedia.org/wiki/Value_at_risk http://www.jpmorgan.com/tss/General/email/1159360877242 http://www.fooledbyrandomness.com/jorion.html
