FINS5542 Assignment 2
Date Due: 11pm 17 July, with electronic submission via the course
website.
1. Discuss, in less than 1000 words, the role of backtesting of VaR
models in portfolio management.
[30 marks]
A useful reference for backtesting is Lucas, A., (2001), “Evaluating the
Basle Guidelines for Backtesting Banks’ Internal Risk Management
Models,” Journal of Money, Credit and Banking, Vol. 33, No. 3. In
particular, one should read p826-831 and the concluding remarks.
2. In this question we will conduct a backtesting exercise for the 1994
year. For each trading day in 1994 we must graph the 99% VaR that
was computed 10 trading days before and we must also graph the
realised loss in the portfolio that occurs over this same period.
One is required to produce two graphs. The first graph should be the
backtesting of the VaR method under normality. The second graph
should be the backtesting of the VaR method under historical sim-
ulation of daily changes in prices. Finally, one should interpret the
findings from both of these graphical displays.
For these exercises, assume that $10,000 dollars was the value of our
holdings in each of our nineteen stocks, ten trading days before the
first trading day in 1994. i.e. On 17 December 1993, the value of our
portfolio is $190,000. Also assume that the number of shares we hold
in each of these stocks does not change over the time frame of our
back-testing exercise. Finally, in computing the VaR estimates one
should use the last 500 changes in prices. The data is located on the
fins5542 Moodle page. See last page, for variable names.
In addition to printing out the Excel graphs, one should also print out
the Ox computer code.
[20 marks]
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3. In this question we will conduct a backtesting exercise for a portfolio
of 4 stocks for the 2007 year. For each trading day in 2007 we must
graph the 99% VaR that was computed 10 trading days before and we
must also graph the realised loss in the portfolio that occurs over this
same period.
One is required to produce two graphs. The first graph should be the
backtesting of the VaR method under normality. The second graph
should be the backtesting of the VaR method under historical sim-
ulation of daily changes in prices. Finally, one should interpret the
findings from both of these graphical displays.
For these exercises, assume that $100,000 dollars was the value of our
holdings in each of CISCO, Microsoft, IBM and American Express ten
trading days before the first trading day in 2007. Also assume that
the number of shares we hold in each of these stocks does not change
over the time frame of our back-testing exercise. Finally, in computing
the VaR estimates one should use the last 500 changes in prices.
In addition to printing out the Excel graphs, one should also print out
the Ox computer code.
[30 marks]
2
Variable Name
aan1 CISCO SYSTEMS INC
aan2 MICROSOFT CORP
aan3 INTEL CORP
aan4 TEXAS INSTRUMENTS INC
aan5 SPRINT CORP
aan6 AMGEN INC
aan7 INTERPUBLIC GROUP COS INC
aan8 MELLON BANK CORP
aan9 WARNER LAMBERT CO
aan10 BRISTOL MYERS SQUIBB CO
aan11 ENRON CORP
aan12 GENERAL ELECTRIC CO
aan13 TIME WARNER INC
aan14 EXXON CORP
aan15 DELL COMPUTER CORP
aan16 AMERICAN EXPRESS CO
aan17 SUN MICROSYSTEMS INC
aan18 CORNING INC
aan19 FORD MOTOR CO DEL
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