How to Code a Multivariate Value at Risk (VaR) VBA Monte Carlo Simulation

Introduction to Value at Risk

Performance evaluation measures such as the Sharpe ratio, Sortino
ratio focused on lower moments assume normality of the distribution
of asset returns. Value at Risk (VaR) is an attempt to characterise the
fatness of the tail of the asset returns, or the kurtosis. Essentially, VaR
is the V in the statement:
"We are x percent certain that we will not lose more than V dollars in
the next N days."
In other words, VaR would be the response to the question "What's
the loss at this level of probability?"
.

The Multivariate VaR Monte Carlo Simulation

There are several methods of calculating VaR: historical simulation,

model-building and Monte Carlo simulation. Here we focus on the
latter.
The calculation steps are as follows.
1. Calculate the current portolio value
2. Sample once from the multivariate normal distribution for each of
the assets in the portfolio using the Cholesky Decomposition of the
correlation matrix to create correlated normal random variables
3. Calculate the asset prices at the end of the time period
4. Calculate the portfolio value at the end of the time period
5. Subtract step 1 result from step 4 result to get the change in value
of the portfolio, (the 'portfolio delta') over the time period
6. Repeat steps 1 to 5 to build up a distribution of the change in value
of the portfolio

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7. Sort the portfolio deltas from lowest to highest using the Quicksort
algorithm
8. Calculate the percentile required (1 - confidence level)
9. VaR is given by portfolio delta(i) where all the portfolio deltas from
N simulations are in a vector, and i = percentile * N
10. VaRs can be extracted as an array for difference confidence
intervals if required
In the following simplified example, we assume a portfolio of assets
with prices that follow the Black Scholes model assumptions.

Multivariate VaR VBA Code

Function VaR_Sim(Runs As Long, S_t_range As Object, K_range As
Object, r_scalar As Double, _
q_range As Object, sigma_range As Object, t_scalar As Double,
Matrix_range As Object, Confidence As Double) As Double
Application.Calculation = xlCalculationManual
Application.Volatile (False)
Application.ScreenUpdating = False
Dim S_Count As Long, i As Long
Dim S() As Double, k() As Double, r() As Double, q() As Double,
sigma() As Double, t() As Double, a() As Double
Dim Vector_Limits As Long
Dim L_Lower As Variant, epsilon() As Variant
Dim j As Long
Dim Sum_S As Double, Val_at_Risk(i) As Double
Dim RandVars

How To Code a Multivariate Value at Risk (VaR) VBA Monte Carlo Simulation

How to Code a Multivariate Value at Risk (VaR) VBA Monte Carlo Simulation
'------------ ASSUME ALL VECTORS HAVE SAME NUMBER OF
CELLS AS # OF ASSET PRICES, DEFINE LIMITS OF ALL
VECTORS THEN REDECLARE -----Vector_Limits = S_t_range.Rows.Count * S_t_range.Columns.Count
ReDim Preserve S(1 To Vector_Limits)
ReDim Preserve k(1 To Vector_Limits)
ReDim Preserve r(1 To Vector_Limits)
ReDim Preserve q(1 To Vector_Limits)
ReDim Preserve sigma(1 To Vector_Limits)
ReDim Preserve t(1 To Vector_Limits)
ReDim Preserve a(1 To Vector_Limits)

Dim N As Integer
Dim Sum_S0 As Double, Delta() As Double, Percentile As Double
RandVars = WorksheetFunction.Transpose(RandVars)
epsilon = Application.WorksheetFunction.MMult(L_Lower,
RandVars)
For i = 1 To Vector_Limits
S(i) = S_t_range(i)
SumS0 = SumS0 + S(i)
q(i) = q_range(i)
k(i) = K_range(i)
r(i) = r_scalar
t(i) = t_scalar
sigma(i) = sigma_range(i, j)
a(i) = r(i) - q(i) - 0.5 * sigma(i)
S(i) = S(i) * Exp(a(i) + sigma(i) * Sqr(t(i)) * epsilon(i, 1))
Sum_S = Sum_S + S(i)

'----------- DECOMPOSE MATRIX -------------------N = Matrix_range.Columns.Count

ReDim L_Lower(1 To N, 1 To N)
For i = 1 To N
For j = 1 To N
L_Lower(i, j) = Matrix_range(i, j).Value
Next j
Next i

Next i
Delta(j) = Sum_S - Sum_S0

L_Lower = cholesky(Matrix_range)

Next j

ReDim Preserve Val_at_Risk(1 To Runs)

ReDim Preserve Delta(1 To Runs)

'Sort the Deltas and select the Delta corresponding to the percentile
Delta = quicksort(Delta)
Percentile = 1 - Confidence
Val_at_Risk = Delta(Round(Percentile * Runs, 0))
VaR_Sim = Val_at_Risk

'----------- GET PARAMETERS AND FILL VECTORS -------------------For j = 1 To Runs

Sum_S = 0
RandVars = Fill_epsilon(Vector_Limits)

Nyasha Madavo, VBA Developer.net

Application.Calculation = xlCalculationAutomatic

How To Code a Multivariate Value at Risk (VaR) VBA Monte Carlo Simulation

How to Code a Multivariate Value at Risk (VaR) VBA Monte Carlo Simulation
End Function

Application.Volatile (True)
Application.ScreenUpdating = True

Function Fill_epsilon(ByVal Vector_Limit As Long) As Variant

Next Steps
Dim i As Long
Dim epsilon() As Double
ReDim Preserve epsilon(1 To Vector_Limit)
For i = 1 To Vector_Limit
epsilon(i) = WorksheetFunction.NormSInv(Rnd)
Next i
Fill_epsilon = epsilon
End Function

Here we've essentially assumed homogeneity of the assets and

assumed that stock prices follow the assumptions of the Black
Scholes model. We've assumed lognormality assumptions as well as
the remaining Black Scholes assumptions such as interest rate and
volatility remaining constant, which would need to be re-appraised.

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How To Code a Multivariate Value at Risk (VaR) VBA Monte Carlo Simulation