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Current VaR Across Market and Asset Classes

Value-at-Risk (VaR) is a statistical measure of risk adopted by financial regulators for assessing capital adequacy requirements to market operators. It is also one of the risk estimators used by advanced asset managers to control portfolio risks. VaR 99.9% at 1 day horizon is a statistically estimated possible daily loss occurring with a frequency once in 1000 days. More...

In the ongoing market crisis, when uncertainty rules the day, maximum insight into the relative risks of various instruments becomes a key for achieving selectivity in redemptions and investments decisions. To facilitate the understanding in the fluctuation of the risk levels across the globalized market and across asset classes, Riskdata provides global indicators of two risk measures - VaR and ShockVaR. Both estimates are the results of the full revaluation overnight Monte-Carlo simulation. To achieve a greater degree of risk transparency, most Riskdata clients also provide detailed risk computations on their strategies to their investors.

• Major Equity Indices VaR's
• Daily Hedge-fund Risk based on HFRX indices
• Var of Risk Budgeted "Global Portfolio" of Equity indices.
• Major Commodities
• Major Government Bond Yields
• Government Bond Yield Spreads
• Implied Volatilities Across Asset Classes
• Major Currencies

Major Equity Indices VaR's

Daily Hedge-fund Risk based on HFRX indices

VaR of HFRX hedge-fund indices is calculated using daily HFRX NaV's provided by HFR (www.hfr.com).

Var of a Risk Budgeted "Global Portfolio" of Equity indices.

Major Commodities

Major Government Bond Yields

Government Bond Yield Spreads

Implied Volatilities Across Asset Classes

Major Currencies

VaR is the maximum estimated amount a security, a portfolio of securities, or an index, may lose at a given time horizon for a given level of confidence. For example, the "1 day, 99% VaR" of the S&P500 index being equal to 4% means that the estimated probability of the S&P falling more then 4% over the course of a day is less then 1%.

Riskdata produces two VaR measures:

1. Riskdata long-term VaR is Var measure designed to be rather stable through time. Long run back-tests over several years show that the frequency of "exceptions" (the actual returns being larger than the long-term VaR) is approximately equal to the specified VaR level(e.g. 1% of the time for the 99% VaR). Its stability makes it useful for capital adequacy requirements. However, its stability is a disadvantage in rapidly changing markets where it can overestimate risk in calm market periods and underestimate it in highly volatile markets.
2. Riskdata's ShockVaR has been developed to overcome the possible over- or under-estimate of the risk during a temporary market crisis. It is a much more responsive estimate that reacts rapidly to changing market regimes. It attempts to anticipate increases and decreases in the VaR by using micro-signals that are sometimes present in pre- or post- shock periods. Back-tests performed on shorter time periods (one year or even a few months) show that the frequency of exceptions during turmoil periods is more inline with the specified VaR level. The Shock VaR is more reactive than the long-term VaR and can increase by a factor of 2 within a few days following a shock - or anticipating a shock. It similarly rapidly falls back to its initial value if the market volatility is back to long term levels.

The chart below shows the 1 month ShockVaR estimates for the FTSE 100 index. One can observe an increased level of the ShockVar since the summer of 2007 and a further important increase around Sept 9th 2008. Just a few days before a period of major market turmoil.

However, although the ShockVar will always react to market shocks, in spite of using advance warning signals, it cannot always anticipate shocks. There are situations that are genuine surprises. In a way, the increase of the ShockVar is a necessary but not a sufficient indicator that the market is in a crisis.

Some Conclusions

The Shock/Long ratio is an estimate of the level of abnormality in instrument risk. A 100% figure would mean that the situation is "as usual" or "as in the long run", anything higher than this figure would mean "more risk", and anything below this figure would mean "less risk than usual". (This refers to the first seven tables).

In addition, if one looked at the "TED Spreads", which is the difference between short term (3 month) interest rates on T-Bills (government paper), and the same term (3 months) on inter-bank rates, it indicates the 'illiquidity of the cash market'. Riskdata measures the risk of such TED spreads across the world markets.

As of October 8, the US TED spread is at the highest level of risk, followed by the UK and Germany. Australian and Swiss markets risk show as "below usual risk".

It is also worth noting that equity markets across the emerging markets display very different patterns. Within the BRIC countries Brazil and Russia show high risk. Whilst India and China show risk as usual.

“This is a challenging and exciting time. Risk managers and senior executives should be seeking more from risk management. Their role needs to evolve as financial institutions increasingly recognize the opportunities and value of a better understanding of risk.”

Phil Rivett
PricewaterhouseCoopers UK