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I'm familiar with the historical full revaluation, VcV, and Delta-gamma methods, but a client keeps talking about a heat-map method and I'm not sure what he's talking about.

Any ideas?

Brian Wilson
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  • AFAIK it is just a graphical method of representing vAR with different markets (FX, bond, stocks, ...) on the vertical axis and time on the horizontal axis, red means high vAR, green means low. Sort of like this https://www.imf.org/external/np/speeches/2008/images/102808s5.jpg – Alex C Jan 27 '16 at 03:30
  • Typically a risk heat map is used to describe the results of a risk assessment. So it might show strenghts and weaknesses in terms of e.g. operational risk. Can also be used for highlighting sources of risk, e.g. for a diversified portfolio. So your client might be looking for a suitable way of risk reporting rather than a specific risk methodology for calculating VaR. – Dr_Be Jan 27 '16 at 07:30

2 Answers2

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Unless otherwise defined, the heat map is a VaR back-testing measure for the soundness of the VaR measure. For example, it may be allowed to have 4 VaR breaches, where the static P&L is greater than the VaR, for the past 250 business days, and any breaches with a total number not more than 4 are said to be in the green zone, while 5 to 9 breaches are in the yellow, or cautionary, zone, while 10 or more breaches will be in the red zone.

Gordon
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Not sure whether your client wants "method" or "visualisation". I might be guessing that he expects you to present results similar to what's shown here https://msci.com/resources/research/articles/2015/Research_Insight_Backtesting_Risk_Models_2014_YearInReview.pdf

Nicholas
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