VaR - Value at Risk (Risk Management)

[quinn123]

Hey,

I was wondering if anyone here uses Value at risk (VaR) to help manage their trading portfolio? I have a VaR calculation which incorporates liquidity, expected rate of return and volatility of a share (LVaR - Liquidity Value at Risk) so I can calculate the maximum expected drawdown and ensure it is in-line with my capital at risk per share (how much of my portfolios capital I'm willing to lose to a single share). Is it possible to incorporate a stop-loss limit, traded volume (Activity), share direction (trend) & a shares market cap into a VaR calculation?

Is value at risk actually necessary if you’re using a stop loss? Won’t the stop loss limit be your maximum drawdown anyway with a little slippage?

I suppose I’m really just looking for a risk management strategy which incorporates a shares liquidity (Depth), traded volume (Activity), volatility, direction (trend) & market cap. I want to basically ensure the share is suited to my risk profile. Maybe you could use some empirical rules such as don’t buy a share with low volume and in a down trend. Although it would be nice to plug all these risk parameters into a VaR calculation and have it spit out a projected maximum loss to see if you should pull the trigger or not.

Cheers.

Michael

 

[mazzatelli]

I use VaR to keep an eye on risk at 2 & 3 sigmas for options portfolio.

imo, it should be used in conjunction with other risk metrics and rules of thumb [e.g. Greeks] rather than trying to incorporate everything.

 

[quinn123]

Thanks mate, I think I will just have to apply some rules of thumb as you suggested.

Is it possible to calculate the average liquidity of a share? I'm going to use the bid-offer spread as a measure of liquidity, but I only know how to get the current measurement which isn't very practical for future predictions. Is there any indicator (in incredible charts) that will tell me the average liquidity of a share over a certain historical time period?

Thanks!

 

[quinn123]

I found that I can get a shares liquidity through commsec... Sweet!

 

[skyQuake]

Thanks mate, I think I will just have to apply some rules of thumb as you suggested.

Is it possible to calculate the average liquidity of a share? I'm going to use the bid-offer spread as a measure of liquidity, but I only know how to get the current measurement which isn't very practical for future predictions. Is there any indicator (in incredible charts) that will tell me the average liquidity of a share over a certain historical time period?

Thanks!

Just use average volume?
Bid/ask can be deceptive; EoD bid/asks are more often than not completely incorrect.

 

[quinn123]

I'm treating the average daily traded volume and liquidity as two different things with my risk management.

Liquidity - I'm using bid-ask spread. So it is the hypothetical loss I would incur if I bought and sold the share straight away. So EOD bid-ask are usually incorrect? I suppose I will just have to accept that, thanks for the info.

Trading volume - I'm using the 5% rule. I won't trade more than 5% of the average daily traded volume of a share.

What are some other rules of thumb?