risk metric framework

Past research shows that there is a significant improvement that is possible if risk metric framework and its deviation is explored. Literatures show that managers face a very difficult problem concerning the choice of an appropriate value at risk measure. This tends to be a difficult task but and financial risk analysts and managers ended up coming up with a term model risk which is meant to cover up the hazard of working with potentially unspecified models. It draws a comparison between parametric models on a certain fixed income and the simulation-based investment portfolios and establish the difference in the Value at risk from the other models applicable to similar portfolio.

Theoretical issues argue that value at risk is the maximum monetary amount that can be lost on an investment portfolio over a given period of time. This is always computed through use of the concept of level of confidence which is estimated at 24 hours time horizon of a confidence level ranging between 95% and 99%. Value at risk calculation requires holding of the period and this extends to the period that the organization will take to liquidate itself. In highly volatile market capital assets charges are always variable for different holding periods. This explains the difference between a 1-day and 10-day liquidation of portfolio. It is imperative that value at risk is calculated on a daily basis by the financial institutions and banks at the 99th percentile on one-tailed confidence interval at a price shock threshold equivalent to about ten days. This model uses past observation period of not less than one year.  Research findings shows that a bank’s capital asset charges that utilizes proprietary model is like to supersede the previous day’s computed value at risk and the mean daily value at risk for the past sixty business days which is a product of multiplication factor and the average. This multiplication factor is from a minimum of three and this is subject to variation depending on regulators perception of the looming potential weakness in the specified modeling process. It is important to note that individual bond estimation using value at risk is fairly simple.  However, estimation of investment portfolio using value at risk requires information derived from historical yield curves. This can be achieved through calculation of single piece series of investment portfolios. Construction of the investment portfolio involves use of weights as the as the share of the bond component value in the overall value of the portfolio.

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