SimplificationsUsuallyMadeinRiskManagement Define u, as (S;-Si-1)/Si-1Assume that the mean value of u, is zeroReplace m-1 by mThis givesIm22nn-li=1m11RiskManagementandFinancialInstitutions3e,Chapter10,CopyrightJohnC.Hull2012
Simplifications Usually Made in Risk Management ⚫ Define ui as (Si−Si-1 )/Si-1 ⚫ Assume that the mean value of ui is zero ⚫ Replace m-1 by m This gives Risk Management and Financial Institutions 3e, Chapter 10, Copyright © John C. Hull 2012 11 sn n i i m m u 2 2 1 1 = = −
Weighting SchemeInstead of assigning equal weights to theobservations we can setMq=α,un-iwheremZα, =1i=1RiskManagementandFinancialInstitutions3e,Chapter10,CopyrightJohnC.Hull201212
Weighting Scheme Instead of assigning equal weights to the observations we can set Risk Management and Financial Institutions 3e, Chapter 10, Copyright © John C. Hull 2012 12 s a a n i n i i m i i m u 2 2 1 1 1 = = = − = where