SPY Montecarlo Simulation with Value at Risk (VaR)

Montecarlo Simulation , or Montecarlo Method, is a mathematical technique, which is used to estimate the possibile outcome of an uncertain event.

Since its introduction, Monte Carlo Simulations have assessed the impact of risk in many real life scenario, such as stock prices, sales forecasting, project management and pricing.

Let us now hypothesize an applicable case in the stock market.

The Investment Fund ABC currently has a 1,000,000 USD position in the SPY Etf. The Risk Manager of the Fund wants to estimate the tail risk(extreme negative outcomes) of this position based on historical data (and forecasts).

We simulate the minimum loss over a period of one quarter that will occur with 1% probability: 1% Value-at-Risk (VaR) of 1,000,000 USD over a period of one quarter (63 business days). I use the bootstrapping method.

The result :

Now I calculate a 1% Value-at-Risk (VaR) of 1,000,000 USD over a period of one quarter

And that’s all folks.
Do your own due diligence and draw your own conclusions

Disclosure: Not Only Equity Analytics.

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