Market Risk
Value at Risk (VaR) as a model for Market Risk
As can be seen, market prices in (1) need to be translated to changes in prices in (2) and then transformed to distribution of returns in (3). From (2) we can also compute volatility and the Value at Risk (VaR) of an asset.
(3) Histogram - Returns bucketed into ranges
Returns are distributed both negative and positive, around zero from which standard devations (i.e. volatilities) are calculated.
(4) A Risk Model is a 'Mapping' Mechanism
Volatilities are 'mapped' to Unexpected Losses (UL)
Next steps
Here are some ideas of things you could try…
Calculate your Value ar Risk (VaR) with
Market Risk Plus where you can try out different inputs and assumptions.
Calculate standard deviation for an asset with
Volatility Plus that automatically calculates the volatility, which is an input to the VaR model.
The VaR methodology, its assumtpions and drivers are also explained here: recommended reading.
The capital requirement for market risk under IFPR is also contained here on our blog.
See our APIs for operational, market and counterparty risks.