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I am using variance co variance matrix for calculating the VaR. Now if the some corporate action comes in between like stock split, resulting a huge VaR number on that particular day as the volatility will drop by huge amount.

For instance, if a stock price series is $\$10, \$10.25, \$10.28, \$10.54, \$10.98, \$11.65, \$11.65$ and so on for the last 1 year and suddenly the stock split comes in between and the prices drops to around $\$5$, resulting in huge volatility and thus impacting my VaR number. How to adjust this as to my VaR numbers looks in synchronization?

Thanks in advance.

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  • $\begingroup$ I would suggest recalculate in sense of adjusted close...as explained here $\endgroup$ – Jan Sila Aug 1 '16 at 17:38
  • $\begingroup$ That's not what I am looking for...you have the link of adjusted closing prices which will impact my volatility as in case of splits, there will be a sudden drop in the price...thus greatly impacting my VaR. $\endgroup$ – Manish Aug 1 '16 at 18:14
  • $\begingroup$ If you calculate it correctly then there will be no drop in price. You basically split or the prices backwards so they correspond to the same number of shares...also when computing a covariance matrix, you need to do it with returns(log returns), not prices! The comovement you want to capture is in returns of the series $\endgroup$ – Jan Sila Aug 1 '16 at 18:50
  • $\begingroup$ Great, hope it helped. If you could tick my answer then, that would be great :) thanks $\endgroup$ – Jan Sila Aug 1 '16 at 19:05
  • $\begingroup$ Hah...yeah sure..!!!! $\endgroup$ – Manish Aug 1 '16 at 19:06
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The prices need to be recalculated for 'Adjusted Close'. You basically split or the prices backwards so they correspond to the same number of shares...also when computing a covariance matrix, you need to do it with returns (log returns), not prices!

The comovement you want to capture is in returns of the series.

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