Marginal VAR

[higaurav]

Hi David,

I am finding some difficulty in grasping concept of marginal VAR , also not able to link up concept with Beta. I am clear on the concept but not able to derive the formula given for computation of marginal VAR. Is there any link (small tutorial) that I can refer to in order to get some more clarity on the concept.

Thanks
OM

 

[David Harper CFA FRM]

Hi OM -

Please take the blog (next week I'll briefcast review jorion's portfolio VaRs carefully).
Did you get a chance to look at the spreadsheet that replicates Jorion's example in Chapter 7?
http://www.bionicturtle.com/premium/editgrid/2008_invest_portfolio_var_analytics/

note green rows 25-27 show three (essentially similar) ways to compute Marginal VaR. The matrix notion uses dollar covariance, but rows 26 and 27 are more straightforward:

row 26: marginal VaR = portfolio VaR/total portfolio * beta (position, portfolio)

and as Jorion shows, since portfolio VaR/total portfolio = VaR% = (normal deviate)*(volatility), then:
row 37: marginal VaR = VaR%*beta = (portfolio volatility %) * (normal deviate) * (beta)

in this way, the difference between beta/marginal VaR is little more than units of expression.

David