The Application Of VaR In The Process Of Portfolio Risk Structure Adjustment

Since the1990s, as the financial derivatives market is developing rapidly, it has alsoincreased the volatility of financial market. The financial crisis in2008made a lot ofbankruptcies of financial institutions and investors, risk management has again becomethe core of financial activities.As Basel II began to promote, VaR-based risk management theory has been widelyused by financial institutions. Now it becomes the mainstream risk management tool in themarket.This article will extend the risk management theory of VaR、 component VaR andmarginal VaR to the stock market portfolio risk adjustment process. In the first part of theempirical analysis, we select the40stocks as a portfolio which covers most sectors ofindustry. We presume the portfolio at the95%confidence level and the holding period ofone day, then use the parametric method and the Monte Carlo method to calculate VaR,CVaR and MVaR, which will be used to analyze the distribution of the portfolio risk andthe risk of a single contribution of stocks. Finally，we use failure rate method to check theeffectiveness of VaR. In the second part，we apply VaR into the mean-VaR portfoliooptimization theory to determine the minimum VaR portfolio, by comparing the historicaltrace of the payoff separately based on the original weight and the optimal investmentweight, we can prove the effectiveness of VaR in portfolio risk-adjusted process.The whole conclusion is that:1）Both the VaR,、CVaR and MVaR can fully reflectthe detailed distribution of the portfolio’s overall risk. CVaR mainly reflects thedistribution ratio of the overall risk in the portfolio’s constituent stocks. MVaR reflects themarginal contribution of the constituent stocks to the portfolio’s overall risk. In order toreduce the overall risk of the portfolio VaR, investors can improve the weight of thesmaller MVaR stocks and reduce the weight of the lower MVaR stocks.2）Comparing with the mean-variance model, mean-VaR portfolio optimizationmodel can better consider the portfolio downside risks. The minimum VaR portfolio is themost effective point on the effective frontier.3）Comparing the historical trace of the payoff separately based on the original weight and the optimal investment weight, we can find that the optimal investment weightcan effectively reduce the downside risks of the future market, but also reduce the benefitslevel of the upside market.