Under the Derivatives Regulation (DerivateV), capital management companies are obliged to provide risk management and risk measurement with particular importance when derivatives are used in investment funds. This obligation had to be implemented in a joint project with the PSplus Portfolio Software + Consulting GmbH for the Flossbach von Storch AG.
In essence, there are two major quantitative requirements for the risk measurement within DerivateV. On the one hand, the risk must be assessed on a daily basis. The value-at-risk is used as a risk measure for a retention period of 20 days and a level of 99%, and the individual risk factors must be reported individually. On the other hand, appropriate stress tests have to be implemented in order to simulate unusual market movements.
Since classical risk models (such as variance-covariance approach or historical simulations) fall short of these challenges, a modern statistical method, namely the Block Bootstrap, was used within the project. Within the process random components of historical returns are drawn, with which possible future developments (so-called paths) are simulated.
In the implementation of the stress tests, a distinction was made between scenario analyzes and historical analyzes. While in a scenario analysis exactly one risk driver is varied and therefore individual risk factors can be considered in isolation, all risk drivers are changed in parallel in historical analyzes. In doing so, the changes can correspond to historical developments – but can also be arbitrarily defined in theory. This makes investigations of complex scenarios possible.
After the pure implementation of DerivateV, further extensive additional modules were developed in order to generate additional value for the portfolio management. For example, the Expected Shortfall was implemented as a further risk measure, making the duration and the confidence level more flexible and implementing the ratios of time value loss and marginal VaR. In addition, the entire package is rounded off by a State-of-the-Art VaR backtest, which regularly and automatically checks the quality of the risk modules. As a result of the project, the Flossbach von Storch AG has been available since the end of 2012 with a powerful and tailor-made tool for risk measurement and control.
– Ziggel, D., Berens, T., Weiß, G.N.F., Wied, D. (2014): A New Set of Improved Value-at-Risk Backtests, Journal of Banking & Finance, Vol. 48, 29-41.
– Ziggel, D., Peters, V., Roestel, A. (2015): Mehrwert durch Risikomessung gemäß der Derivateverordnung, Absolut|report, Jg. 2015, Nr. 2, S. 62-67.