On optimizing of scenario simulation for risk estimation of financial instruments

Recieved: 08/14/2024

Accepted: 10/27/2024

Published: 01/31/2025

Keywords: Monte Carlo method, scenario simulation, interest rate swap, Value-at-Risk

To cite this article

Gudkov I.D., Demin D.A., Nazarov L.V. On optimizing of scenario simulation for risk estimation of financial instruments. // Moscow University Journal. Series 15. Computational Mathematics and Cybernetics. 2025. N 1, p.35-42 https://doi.org/10.55959/MSU/0137–0782–15–2025–49–1–35–42.

This work is licensed under a Сreative Commons Atribiution - NonCommercial 4.0 International (CC BY-NC 4.0)

Gudkov I.D. (Central Bank of the Russian Federation)
Demin D.A. (Lomonosov Moscow State University (MSU))
Nazarov L.V. (Lomonosov Moscow State University (MSU))

Abstract

The paper describes a modified scenario method for risk estimation of financial instruments. It is based on the scenario method proposed by Jamshidian F. and Zhu Y. allowing to significantly reduce computation time of risk indicators on large portfolios compared to the Monte Carlo method. It is proposed to change the way of choosing scenarios and points of approximating distribution. It allows to improve the quality of approximation. More than that, the new method makes possible to remove restrictions on the type of distribution of portfolio price factors allowing to expand the scope of its application. The comparison of VaR (value at risk) estimation using original and modified method was performed on a financial portfolio consisting of an interest rate swap for cases when the values of the price factors have normal distribution, gamma distribution and Student’s t-distribution.