(I had trouble posting a comment on the briefcast page. I always get screwed by that word I am supposed to type that matches the one in the image. Don't know what I am doing wrong...) Anywho....
David: I just saw your screencast here...There might be a small boo-boo in your XLS. When you take into account the volatility of the spread, the critical z-value (at 5% significance) -- you have used the same z-value that you used for computing the absolute VaR, i.e. 1.64.
I've read in maybe Culp, that in the case where you are augmenting the absolute VaR, the critical z-value -- for the spread distribution -- should be the 2-tailed value and not 1-tailed value. Thus at 5% significance, your computation for adding the liquidity delta is:
0.5 * (1% + 1.96*0.8%)
and not the 1-tailed 1.64. Do you agree?
--sridhar
David: I just saw your screencast here...There might be a small boo-boo in your XLS. When you take into account the volatility of the spread, the critical z-value (at 5% significance) -- you have used the same z-value that you used for computing the absolute VaR, i.e. 1.64.
I've read in maybe Culp, that in the case where you are augmenting the absolute VaR, the critical z-value -- for the spread distribution -- should be the 2-tailed value and not 1-tailed value. Thus at 5% significance, your computation for adding the liquidity delta is:
0.5 * (1% + 1.96*0.8%)
and not the 1-tailed 1.64. Do you agree?
--sridhar