Revista Matemática Iberoamericana
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Published online: 2001-08-31
Harmonic analysis in value at risk calculationsClaudio Albanese and Luis Seco (1) University of Toronto, Toronto, Canada
(2) University of Toronto, Toronto, Canada
Value at Risk is a measure of risk exposure of a portfolio and is defined as the maximum possible loss in a certain time frame, typically 1-20 days and within a certain confidence, typically 95%. Full valuation of a portfolio under a large number of scenarios is a lengthy process. To speed it up one can make use of the total delta vector and the total gamma matrix of a portfolio and compute a Gaussian integral over a region bounded by a quadric. We use methods from harmonic analysis to find approximate analytic formulas for the Value at Risk as a function of time and of the confidence level. In this framework the calculation is reduced to the problem of evaluating linear algebra invariants such as traces of products of matrices, which arise from a Feynmann expansion. The use of Fourier transforms is crucial to resum the expansions and to obtain formulas that smoothly interpolate between low and large confidence levels as well as between short and long time horizons.
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Albanese Claudio, Seco Luis: Harmonic analysis in value at risk calculations. Rev. Mat. Iberoam. 17 (2001), 195-219. doi: 10.4171/RMI/293