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Equity Risk Assessment – Historical Simulation and Parametric Method

Get hands-on experience with equity risk assessment in the project, "Equity Risk Assessment – Historical Simulation and Parametric Method", which will enhance your analytical abilities, enable you to think like a risk manager, and provides an understanding of how risk management works in the investment banking industry.


You'll work with real historical time-series data of a specific equity stock and analyze the risk involved in investing in it. You'll learn how Risk Analysts use the Value-at-Risk (VaR) model, which is commonly used by risk managers and traders to assess the financial risk associated with a portfolio of securities, to evaluate the portfolio's risk exposure. You'll also learn how to compare results and understand the assumptions and limitations of each method.


Please carefully read the relevant materials, as they will serve as the foundation for you.

  1. Obtain the historical time-series data for a specific equity stock with a minimum lookback period of 3 years.

  2. Calculate the equity shocks for the time series considering either discrete proportional or continuous proportional shock type.

    1. Compute the rolling risk (value-at-risk) at a 99% confidence level by applying the historical simulation method over a 3-year lookback period, considering 252 trading days a year.

    2. Repeat the process in point 2(a) by applying the parametric method assuming the return distribution to be normal.

Make a list of observations and assumptions, and highlight the drawbacks of the historical simulation method (2(a)) and the parametric method (2(b)).



Understanding How Risk Managers use Value-at-Risk Measure for Risk Assessment

Value-at-Risk (VaR) model is used by risk managers and traders to assess the financial risk associated with a portfolio of securities and is typically run daily to ensure that the portfolio remains within risk tolerance limits. The results from the model are reviewed by risk managers, traders, and other stakeholders to assess the portfolio's risk exposure and ensure that the investment strategy aligns with the bank's overall risk tolerance level.


Obtain the historical time-series data for a specific equity stock with a minimum lookback period of 3 years.

Risk Analysts typically start by collecting historical data on the financial variable, such as stock prices, and compute the market returns that can be used to estimate the expected returns and volatility of an equity position.

Read Applied Time Series Models for Equity Risk – Simple vs. Exponential to read the process of extracting the historical time-series data!

Historical Time Series Data of Equity Prices


Backtest Result: Historical Simulation VaR Method

Backtest Result: Historical Simulation VaR Method

Backtest Result: Parametric VaR Method

Backtest Result: Parametric VaR Method

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