I'm currently working on an application that, among other things, computes a one-day parametric VaR for security positions. I understand that the parametric method of computing VaR is a poor fit for non-linear instruments, such as options and fixed income. Thus my question:
How can I evaluate how poor a fit a parametric VaR result would be for a given holding?
I'm interested in both rules of thumb - for example, "credit default swaps are always a poor fit for a parametric VaR computation" and guidelines, such as "fixed income securities become increasingly non-linear as duration increases, and are a poor fit for a parametric VaR computation once duration is above X" I have no idea if either of those statements are true. I made them up.