VaR and ES using Historical Simulation
1. Context
In this short video from FRM Part 1 curriculum, we take a look at how to use the Historical Simulation approach for estimating the Value-at-Risk (VaR) and Expected Shortfall (ES) for a portfolio. We identify our risk factors, translate their historically observed levels into day-on-day changes (percentage or actual changes as the case may be for a given risk factor), create scenarios based on these changes and then subject our portfolio to these scenarios to generate a series of simulated losses. A sorted series of simulated losses then helps us arrive at the Value-at-Risk and Expected Shortfall at a given choice of confidence and horizon. The details of the reading in which this topic appears are given below:
| Area | Valuation and Risk Models |
| Reading | Calculating and Applying VaR |
| Reference | Chapter 2. Calculating and Applying VaR In GARP Official Books (FRM Part I, VRM section) (GARP, 2020). |