Value at Risk

Quasi-Monte Carlo beats Monte Carlo for Value at Risk

Monte Carlo simulation is widely used in pricing and risk management of complex financial instruments. Deterministic simulation methods (quasi-Monte Carlo methods) are superior to Monte Carlo in terms of accuracy and speed.

In a recent paper, titled “Deterministic Simulation for Risk Management”, co-authored with S. Paskov, we show how deterministic simulation can be applied to the calculation of Value at Risk. For our tests, we use a portfolio of equity and currency european call options and a portfolio of collateralized mortgage obligation tranches. The deterministic simulation method that uses points from the generalized Faure low discrepancy sequence consistently outperforms Monte Carlo.

For our test results see the Examples section and in particular the pages VaR: Portfolio of Options and VAR: CMO.