Overview

The task you are given is to estimate the market risk for a hypothetical holding of 1,000 NAB shares, held on August 3, 2020 (you are working out the risk position assuming that you own these shares at the open of trading that day). You will do this by estimating the Value-at-Risk for the stock using historical data.

Description

You will be asked to calculate the following;

• 10 day VaR for the portfolio of shares at a confidence level of 99%.

Note: This risk estimate applies to the next 10 trading days from August 3, 2020 until August 14, 2020 (i.e. it should be a forecast of risk).

Based on what you have learnt from EFB344, you realized that you have several options for how to compute this risk measure. You are considering using a VaR based on

1. the normal distribution using a 252 day rolling window,
2. the normal distribution using a 66 day rolling window,
3. the normal distribution using the EWMA (lambda = 0.94),
4. historical simulation based on a window of 252 days, or
5. historical simulation based on a window of 66 days.

To aid in the decision of which to use, you are going to consider the recent historical performance of the five models in calculating 1 day VaR at the confidence level of 99%. You will do so by first examining the frequency of instances when the VaR was exceeded by the observed return using the last five years of data.