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I would like to know how you would compute Value at Risk on a portfolio of futures i.e rates futures, commodity futures and equity. How do you deal with the discontinuous form of commodity futures for example, how do you select the right time series for these futures when liquidity and seasonality aspects kicks in. Do we need to build a constant maturity futures contract to be able to calculate the VaR? Or we can directly calculate the VaR on the continuous price time series( GFUT as example on Bloomberg). I am afraid that as Parametric VaR involves the calculation of CovVar matrix of returns, the selection of good n fair prices of futures in critical in order not to get misleading results of VaR?

Any experience on that?

Thank you very much

S

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  • $\begingroup$ Have you looked at the paper of Duffie and Pan (2001) "Analytical value-at-risk with jumps and credit risk" or the paper Glasserman et. al. (2002) "Portfolio Value-at-Risk with Heavy-Tailed Risk Factors"? $\endgroup$ – Aborna Aug 5 '15 at 12:52
  • $\begingroup$ For commodities and equities I just use the continuous price series from Bloomberg like you mention. I don't know about rates futures, I don't have any experience with those. $\endgroup$ – noob2 Aug 5 '15 at 12:59
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This link has a worthwhile discussion of two possible approaches: the Nearby approach (paragraph 6.6.1) and the Constant Maturity approach (para 6.6.2). http://www.value-at-risk.net/futures-prices/ . With the pluses and minuses of each. Ultimately it is going to come down to your judgement of what is best in your situation.

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There are ways to get a continuous time series from switching futures prices. These include: 1) Taking return of a leading future contract (max open interest) on every date, and 2) Taking a weighted average return among a group of leading contracts, with weights based on open interest of each contract. For example:

R_average = (OI1*R1 + OI2*R2)/(OI1 + OI2)

on any given date, where OI is Open Interest and R is return for contracts with top 2 OIs among the contracts traded on that date.

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  • $\begingroup$ Questioner already mentioned that he has the "continuous price time series". Wants to know if it is good to use in calculating VaR. $\endgroup$ – noob2 Aug 6 '15 at 14:55
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    $\begingroup$ I was answering primarily this: "How do you deal with the discontinuous form of commodity futures for example, how do you select the right time series for these futures when liquidity and seasonality aspects kicks in.". So I tried to demonstrate a way to get a fair price time series. $\endgroup$ – mt_christo Aug 6 '15 at 15:56

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