Survey_ABCD_2005

Abstract

We first discuss the construction of historical portfolio values, which is a necessary precursor to any portfolio-level VaR analysis. We then discuss direct computation of portfolio VaR via historical simulation, exponential smoothing, and GARCH modeling. In principle it is easy to construct a time series of historical portfolio returns using current portfolio holdings and historical asset returns. In practice, however, historical asset prices for the assets held today may not be available. Examples where difficulties arise include derivatives, individual bonds with various maturities, private equity, new public companies, merger companies and so on. For these cases “pseudo” historical prices must be constructed using either pricing models, factor models or some ad hoc considerations. The current assets without historical prices can for example be matched to “similar” assets by capitalization, industry, leverage, and duration. Historical pseudo asset prices and returns can then be constructed using the historical prices on these substitute assets.