OPTION PORTFOLIO VALUE AT RISK USING MONTE CARLO SIMULATION UNDER A RISK NEUTRAL STOCHASTIC IMPLIED VOLATILITY MODEL

Peng He

Global Journal of Business Research, 2012, vol. 6, issue 5, 65-72

Abstract: This paper calculates option portfolio Value at Risk (VaR) using Monte Carlo simulation under a risk neutral stochastic implied volatility model. Compared to benchmark delta-normal method, the model produces more accurate results by taking into account nonlinearity, passage of time, non-normality and changing of implied volatility. Two parameters in the model: the correlation between underlying and the at –the-money implied volatility and the volatility of percentage change of the at- the-money implied volatility, can explain market skew phenomena quite well.

Keywords: Stochastic Implied Volatility Model; Value at Risk; Market Skew Phenomena (search for similar items in EconPapers)
JEL-codes: C63 G13 G17 (search for similar items in EconPapers)
Date: 2012
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