Using Monte Carlo simulation to calculate Value At Risk

[Deimantas]

Homework Statement

Calculate 5-day 1% Value at Risk of a portfolio using Monte Carlo simulation.

Homework Equations

The Attempt at a Solution

I've found an article explaining how to perform Monte Carlo simulation on portfolio returns therefore calculating the Value At Risk (pdf attachment). I've followed all the instructions and implemented it in Excel (zip attachment).
There are 3 main methods to estimate the VaR of a portfolio - historical simulation, parametric approach and Monte Carlo simulation. Historical simulation gives 5-day VaR=566.59, parametric approach gives 5-day VaR=486.92, and here Monte Carlo simulation gives 5-day VaR equaling around 360. I doubt the Monte Carlo result is accurate (seems way too low). I'm afraid there might be some errors in my excel implementation. I'd appreciate it if someone could kindly help me spot them.

 

[mighty2000]

Hello,

First of all, great job on implementing the Monte Carlo simulation in Excel! It looks like you have followed all the steps correctly and have a good understanding of the different methods for calculating VaR.

In terms of your concern about the Monte Carlo result being too low, there are a few things you can check to make sure your implementation is accurate.

1. Check your random number generator: In Monte Carlo simulation, the results are highly dependent on the random number generator used. Make sure you are using a good random number generator that is producing truly random numbers.

2. Check your sample size: The more simulations you run, the more accurate your results will be. Make sure you are running a sufficient number of simulations to get reliable results.

3. Check your assumptions: Monte Carlo simulation relies on assumptions about the distribution of returns. Make sure you are using the appropriate distribution for your portfolio returns. You can also try using different distributions to see if it affects your results.

4. Check for errors in your Excel formula: Double check all your formulas and make sure they are correctly referencing the cells and ranges you intended. It's always a good idea to have someone else review your spreadsheet to catch any potential errors.

I hope this helps and good luck with your analysis!