A simulation environment for discontinuous portfolio value processes

Abstract

SUMMARYWe present a simulation-based approach to the estimation of portfolio's Value-at-Risk!VaR*, based on the de"nition of a jump-di!usion continuous time process driven by Wiener and Poisson uncertainty. We introduce to this end a novel characterization of the intensity rate of the Poisson process, modelling the arrival of shocks to the market, as a function of a credit spread curve estimated in high-risk emerging bond markets. The procedure is described and tested on the August 1998 Russian crisis whose impact on liquid equity markets is also estimated.