I have an interesting problem regarding VaR for two assets. Instead of having binomial distribution the assets are subject to occasional shocks with e ~ N(0,1). However, I don't understand the answer of it. I hope anyone could shed some light on it.
Here you go, consider two assets, X and Y, that are usually normally distributed but are subject to occasional shocks. In particular, assume that X and Y are iid with
X=e+w where e ~ N(0,1) and w = { with prob 0.991 and -10 with prob 0.009}
consider a portfolio of X and Y. Then
99% VaR (X + Y) = 9.8 > 99% VaR (X) + 99% VaR (Y) = 3.1 +3.1 =6.2
Thanks,
Ted
Here you go, consider two assets, X and Y, that are usually normally distributed but are subject to occasional shocks. In particular, assume that X and Y are iid with
X=e+w where e ~ N(0,1) and w = { with prob 0.991 and -10 with prob 0.009}
consider a portfolio of X and Y. Then
99% VaR (X + Y) = 9.8 > 99% VaR (X) + 99% VaR (Y) = 3.1 +3.1 =6.2
Thanks,
Ted
