VaR is the quantification of unrealized gain/loss, so RAROC (risk-adjusted return on capital) values also pertain to unrealized gain/loss only. Realized gains and losses are no longer categorized as risks, so the system does not include them in RAROC calculation.
The best method really depends on the asset type. Variance and covariance methods are best suited for linear assets, while historical simulation and the Monte Carlo method are recommended for portfolios with a significant proportion of non-linear assets. In addition, the configuration of parameters also influences accuracy. Backtesting can be used to determine the best model for your portfolios.
Due to the increasing likelihood of extreme market events (also called “fat-tail distribution”), and because the historical simulation method is based on actual market performance, risk values may sometimes appear larger than if normal distribution is assumed (as is the case with other statistical methods).
The system currently provides transaction data from the stock markets of seven East Asian countries. For stocks traded in other countries, you will need to upload the daily transaction data yourself and set the corresponding exchange rate in order for the system to perform calculations.
The system auto-saves all of your operations. You can look up previous value-at-risk results using the “search for reports” function. Alternatively, you may export data to an Excel spreadsheet if you so choose.
The system provides a price-weighted stock market index as well as sector-specific indices (financial sector index, electronics sector index, etc.) as performance indices for equity assets. It also provides the real effective exchange rate (REER) published by the Taipei Foreign Exchange Market Development Foundation as an exchange rate index and the UOB Government Bond Index as an interest rate index. The Taiwan Government Bond Index will be included in the near future.
Stress events are extreme financial market anomalies that have occurred in the past (such as the 9/11 attacks). Values are arrived at objectively through research of similar events. Alternatively, users may set their own criteria based on their experience.
The system is installed on the client’s own infrastructure, so all computation is done locally within your company, keeping your portfolio data safely guarded.
The system relies on widely accepted statistical methods for risk assessment, including variance/covariance analysis, factor analysis, historical simulation, and the Monte Carlo method. Test results are in keeping with predictions found in the relevant literature. Furthermore, TEJ has renowned scholars on staff to validate the system.
A data point is only considered valid if there is no missing value for any of the risk factors. Invalid data points are excluded from the analysis. The number of asset types usually increases after consolidation, and because each factor has a different set of transaction dates, the likelihood of exclusion becomes higher.