The risk management group estimates the 1-day 99% VaR on a long-only, large-cap equity portfolio using a variety of approaches.
A daily risk report shows the following information:1-day 99% VaR Estimates (by approach):
Delta-Normal VaR : 321,890
Monte Carlo Simulation VaR: 353,851
Historical Simulation VaR: 375,534
Which of the following is the most likely explanation for the variation in VaR estimates?
A. Data problems
B. Differences in model assumptions
C. Endogenous model risk
D. Programming errors
VaR measures will vary according to the approach (delta-normal, historical simulation, Monte Carlo simulation).
The variation in these values does not suggest bigger problems with data or programming/implementation nor is there any reason to suspect endogenous model risk (e.g., traders gaming the system to lower risk values).