VaR – Linear Model

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In the previous note about VaR, I discussed and showed how it is calculated using simulation of historical data. Now I will demonstrate how it is calculated using linear modeling.

First, we again construct the statistics of historical data;

Then we calculate returns obtained from price changes — LN (t1/t0);

After that, we build the Variance–Covariance matrix;

Finally, we compute VaR and the Expected Shortfall according to the chosen confidence interval

As the number of days increases, the risk also increases:

VaR – Linear Model (Excel)

Adapted from the source:

Options, Futures & Other Derivatives, John C. Hull

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