The Efficiency Analysis Of The Options VaR Model

Domestic options trading is still in its infancy, whether it is stock index option or OTC futures option will have a huge space for development.Therefore, suitable risk management tools for the options are very important. To conduct a thorough research to the options on the VaR models, this paper hopes to help regulators and investors to have a more comprehensive understanding and an efficient measurement on options risk. Options risk measurement methods mainly include two categories:1. The Greek parameters; 2. The VaR model. Greek parameters, like sensitivity analysis, can only measure the single factor’s influence on the option value. VaR model like pressure test, under the constraint of a certain time and certain degree of confidence, measures the overall risk of options portfolio.In this paper, options VaR model calculation methods are summed up as the following four types:formula method, monte-carlo simulation method, historical simulation method and the Greek parameters. Each kind of methods can be transformed according to the actual demand and different purpose. We find that the formula method and Greek parameters method are suitable for simple option risk measurement; Under normal circumstances, the monte-carlo simulation method is suitable for risk measurement of exotic options; Historical simulation method is suitable for the options portfolio risk measurement, when recent volatility is larger.At present, domestic scholars focus on options VaR model at the aspect of innovation and improvement on calculation method, but ignore the inherent defects of the model. From the perspective of financial economics, this paper analyzes the options VaR model. Mainly with the help of the three major theories, the conclusions are as follows:1. In consistency analysis, we find the VaR model does not satisfy sub-additivity.2. From the expected utility theory, we find the VaR can’t measure the degree of tail loss and index of VaR is not an economical rationality.3.From the duality theory, we find that the VaR model includes risk neutral hypothesis. This is not consistent with financial institutions and financial regulatory risk preference. In addition, because the options has high leverage, asymmetric and profit distribution varied characteristics, they will further enlarge the inherent defects of the VaR model. So, if regulators or investors simply use VaR model to measure the options risk, it’s easy to draw wrong conclusions.Aiming at the problems of the VaR model, CVaR model can amend the sub-additivity and tail loss measurement problems. But due to its calculative complexity and cannot be carried out back-testing, it has not been widely used in practice field. After discussing the intrinsic logic of CVaR and options in the end, this paper also proposes a new riskmeasure for further research.In the empirical analysis, this article has carried outthree examinations:1. The effectiveness of single option VaR model; 2.The VaR modelused by market makers will overestimate the overall risk; 3. The CVaR model is more effective than the VaR model in the option risk measurement.In conclusion, although the option VaR model is widely used by financial institutions and regulators,considering the itsdefects, We should be cautious when using it. It is better to combine options VaR model with CVaR model to have a more comprehensive understanding of tail risks. At the end of this article, combining with the above conclusion, we give investors, options market makers and regulators some proper advice for option risk-management issues.