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FINS5542 Assignment 2
FINS5542 - Applied Funds Management
19 Found helpful • 15 Pages • Essays / Projects • Year: Pre-2021
FINS5542 Assignment 2 1. Discuss, in two pages or less, the role of backtesting of VaR models in portfolio management. [20 marks] A useful reference for backtesting is Lucas, A., (2001), “Evaluating the Basle Guidelines for Backtesting Banks’ Internal Risk Management Models,” Journal of Money, Credit and Banking, Vol. 33, No. 3. In particular, one should read p826-831 and the concluding remarks. 2. In this question we will conduct a backtesting exercise for the 1997 year. For each trading day in 1997 we must graph the 99% VaR that was computed 10 trading days before and we must also graph the realised loss in the portfolio that occurrs over this same period. One is required to produce two graphs. The first graph should be the backtesting of the VaR method under normality. The second graph should be the backtesting of the VaR method under historical simulation of daily changes in prices. Finally, one should interpret the findings from both of these graphical displays. For these exercises, assume that $10,000 dollars was the value of our holdings in each of our nineteen stocks, ten trading days before the first trading day in 1997. i.e. Ten trading days before the first trading day in 1997, the value of our portfolio is $190,000. Also assume that the number of shares we hold in each of these stocks does not change over the time frame of our back-testing exercise. Finally, in computing the VaR estimates one should use the last 500 changes in prices. The data is located in the fins5542 webpage. See over page, for variable names. In addition to printing out the graphs, one should also print out the Ox computer code. [20 marks] 1 3. In this question we will conduct a backtesting exercise for a portfolio of 5 stocks for the 2006 year. For each trading day in 2006 we must graph the 99% VaR that was computed 10 trading days before and we must also graph the realised loss in the portfolio that occurrs over this same period. One is required to produce two graphs. The first graph should be the backtesting of the VaR method under normality. The second graph should be the backtesting of the VaR method under historical simulation of daily changes in prices. Finally, one should interpret the findings from both of these graphical displays. For these exercises, assume that $100,000 dollars was the value of our holdings in each of CISCO, Microsoft, IBM, American Express and Time Warner ten trading days before the first trading day in 2006. Also assume that the number of shares we hold in each of these stocks does not change over the time frame of our back-testing exercise. Finally, in computing the VaR estimates one should use the last 500 changes in prices. In addition to printing out the Excel graphs, one should also print out the Ox computer code. [30 marks]
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