Market Risk Analysis (Censrisk™)

FAQs
Q.
One of our portfolios includes stocks with recent IPO dates. How does the system make up for the insufficient sample size for the entire portfolio?

We offer two options: reference stock and pre-IPO treatment. The system automatically screens for stocks and mutual funds with insufficient data points in the portfolio during calculation and automatically memorizes the settings for the next round of calculations to save your time. Subsequent modifications are still possible.

Q.
What are single/component/incremental values-at-risk?

Ÿ  Single VaR: The value-at-risk of a single investment target without consideration of the risk diversification effects present in the portfolio.

Ÿ  Incremental VaR: Additional value-at-risk attributable to the inclusion of a new investment target.

Ÿ  Component VaR: The value-at-risk of the entire portfolio attributable to a certain investment target while accounting for risk diversification effects.

Q.
Which is used in backtesting, fixed portfolios or historical portfolios?

Backtesting: Historical VaRs and gains/losses are calculated based on a fixed portfolio.

Daily backtesting: Historical VaRs and gains/losses are calculated based on actual historical portfolios.

The purpose of backtesting portfolios is to validate the model.

Q.
My company has an existing mutual fund code name system. Will I be notified when new mutual funds hit the market?

Information on newly established mutual funds can be found in“Newly Listed Assets”under the“Notes”section of the system. A“Mutual Fund Code Name Index”is also available for quick reference.

Q.
Why is the sample size smaller after asset consolidation?

A data point is only considered valid if there is no missing value for any of the risk factors. Invalid data points are excluded from the analysis. The number of asset types usually increases after consolidation, and because each factor has a different set of transaction dates, the likelihood of exclusion becomes higher.

Q.
How reliable is the methodology?

The system relies on widely accepted statistical methods for risk assessment, including variance/covariance analysis, factor analysis, historical simulation, and the Monte Carlo method. Test results are in keeping with predictions found in relevant literature. Furthermore, TEJ has renowned scholars on staff to validate the system.

Q.
What measures does TEJ take to safeguard the privacy of our portfolio data?

The system is installed on the client’s own infrastructure, so all computation is done locally within your company, keeping your portfolio data safely guarded.

Q.
How are “stress events” defined?

Stress events are extreme financial market anomalies that have occurred in the past (such as the 9/11 attacks). Values are arrived at objectively through research of similar events. Alternatively, users may set their own criteria based on their experience.

Q.
What performance benchmarks are available in the system?

The system provides a price-weighted stock market index as well as sector-specific indices (financial sector index, electronics sector index, etc.) as performance indices for equity assets. It also provides the real effective exchange rate (REER) published by the Taipei Foreign Exchange Market Development Foundation as an exchange rate index and the UOB Government Bond Index as an interest rate index. The Taiwan Government Bond Index will be included in the near future.

Q.
Can I save a copy of the values and reports produced by the system?

The system auto saves all of your operations. You can look up previous value-at-risk results using the “search for reports” function. Alternatively, you may export data to an Excel spreadsheet if you so choose.

Q.
Can the system calculate value-at-risk of foreign stocks?

The system currently provides transaction data from the stock markets of seven East Asian countries. For stocks traded in other countries, you will need to upload the daily transaction data yourself and set the corresponding exchange rate in order for the system to perform calculations.

Q.
Value-at-risk appears to be larger using the historical simulation method. Why is that?

Due to the increasing likelihood of extreme market events (also called “fat-tail distribution”), and because the historical simulation method is based on actual market performance, risk values may sometimes appear larger than if normal distribution is assumed (as is the case with other statistical methods).

Q.
Which method should I use?

The best method really depends on the asset type. Variance and covariance methods are best suited for linear assets, while historical simulation and the Monte Carlo method are recommended for portfolios with a significant proportion of non-linear assets. In addition, the configuration of parameters also influences accuracy. Backtesting can be used to determine the best model for your portfolios.

Q.
How is RAROC calculated? Does it include realized gains and losses?

VaR is the quantification of unrealized gain/loss, so RAROC (risk-adjusted return on capital) values also pertain to unrealized gain/loss only. Realized gains and losses are no longer categorized as risks, so the system does not include them in RAROC calculation.

Q.
If I update a portfolio, will its historical risk values be removed from the system?

To update a portfolio, simply reupload it to the system. Historical values will remain in the system. Warning: Do not delete the portfolio. Doing so will also delete all historical reports from the system.

Q.
Which model is used in Monte Carlo simulations?

Geometric Brownian Motion (GBM) is used for equity and foreign exchange factors, whereas the Vasicek Model is used for interest rate factors owing to their tendency of mean reversion.

Q.
What is performance index VaR and why is it useful?

Performance index VaR is the benchmark VaR per unit of investment target. It is useful when comparing the risk of a given target with a benchmark instrument (e.g., securities vs. weighted stock market indices). It can be interpreted as the increase in the target’s risk exposure per additional unit of VaR.

Q.
What are the sources for yields shown in the system?

Yield values come from three sources: benchmark government bond yields, spline-fitted zero-coupon yields, and interest rate swap (IRS) yields.

Q.
How does the system treat assets held for more than one day (e.g., 10 days)?

Assuming that all variables are independent and identically distributed (so that time conforms to the laws of arithmetic) and because variance is a square value, the total VaR is calculated as daily VaR multiplied by the square root of the number of days for which the assets are held.

Q.
Are risk diversification effects reflected in the reports?

You will find a“diversification effects”column in the reports which shows the risk reduction effect if an asset negatively correlated with the portfolio is constructed. You can also infer this information from the positive or negative sign of the incremental VaR.