MONTE CARLO WITHIN A DAY

Juan D. Cárdenas, Emmanuel Fruchard, Jean-François Picron, Cecilia Reyes, Kristen Walters and Weiming Yang
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Juan D. Cárdenas: Financial Technology Group at Summit Systems, Inc., New York, USA
Emmanuel Fruchard: Financial Technology Group at Summit Systems, Inc., New York, USA
Jean-François Picron: Financial Technology Group at Summit Systems, Inc., New York, USA
Cecilia Reyes: Quantitative Risk Management, ING Barings, UK
Kristen Walters: Financial Technology Group at Summit Systems, Inc., New York, USA
Weiming Yang: Financial Technology Group at Summit Systems, Inc., New York, USA

Chapter 13 in Quantitative Analysis in Financial Markets:Collected Papers of the New York University Mathematical Finance Seminar(Volume II), 2001, pp 335-345 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis article presents an innovative approach to measuring intra-day VaR that combines the use of a robust parametric technique, Gamma VaR,a with Monte Carlo simulation to capitalize on the respective strengths of these models. The simulation is optimized by using parametric VaR results to limit the required number of portfolio revaluations to those random scenarios that are statistically relevant given the greek-estimated profit and loss distribution, and as a variance reduction tool to minimize the standard Monte Carlo error term. As the results presented here will show, these techniques, combined with portfolio and market risk factor compression, significantly enhance the performance and precision of the Monte Carlo engine. Although VaR alone, no matter how sophisticated the model, is not sufficient to effectively capture all possible market moves, it is an invaluable intra-day tool for risk managers.

Date: 2001
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