NuclearPhynance Archive

As a utility we have long holding periods for risk, currently I am looking at using Monte carlo methods to calculate the risk over these long holding periods but when it comes to calculating the VaR contributions for different desk they are very unstable (if I run the same simulation twice the number can be very different). I am thinking about using seeded random numbers (or qmc) or using contribution to expected shortfall to calculate contirbution to the VaR number.



Has anyone any experience of this or any criticisms of the approaches I have written here? (assume here that millions of simulations are not possible to achieve total convergence, just 10k or so).

I am thinking about using seeded random number



as opposed to?

I meant the same seed each time, so the number does not change on a rerun.

Hmmm... so the number will be the same each time. And, according to you, if you chose a different seed, it would be the same each time, but a different same. Ergo, there is something fishy happening. There should not be dramatic variations in the output. I would suggest you have an error somewhere in your methodology.

How are you calculating the VaR contributions?



If you are just taking the contributions to the P/L on the path that is the correct quantile for the VaR simulation I would expect instability even with a large number of simulations since the result is always dependent on a single path and this I expect would give it poor convergence properties (I'm not surprised that you get very different results when you rerun the simulation with a decent number of paths). I don't think any messing around with the seed number will help here, IMO it would just obscure the problem rather than solve it.



I think your suggestion of working with contributions to the expected shortfall would be more promising. In that case you'll be averaging the contribution to P/L over several simulations. There's a reason to expect some kind of convergence in this case because of the averaging.

Adeuklon Graeme



Thank you.



I was calculating the VaR contribution based on conribution to the single path which is clearly very unstable, but I will be using contribution to ES.

Just to follow up with the other replies, how many runs are you doing etc?

about 10,000

Is this for generation unit(s) and are you seeing similiar bands appear?

what do you mean by bands?