7. Value At Risk (VAR) Models

[@avarmauk]

I think MIT is doing a great service to humanity by allowing people to see such lectures online. I will donate. I hope others do too. Together we can make education a right and not a privilege.

[@oussamaelbaz5932]

@@raulbartolome8389 Not all heroes wear capes, thanks man! :)

[@cherieminn2673]

YES KNOWLEDGE FOR ALL

[@alexvidal821]

Agreed

[@Jaggerglam9043]

Especially considering a conceited self-appraisal half the lecture. The fuck I care about who the teacher is. The best teachers talk about the subject non-stop, not their credentials.

[@firstal3799]

So what? He seems an intelligent engaging and sympathetic teacher.

[@SeikoVanPaath]

Some notable Timestamps: 0:06:19 Methodology 0:38:33 Covariance, Correlation & Matrix algebra 0:46:50 The big picture 1:00:51 Monte Carlo

[@antonioaltamore618]

44:40 cookie

[@pakonicoco]

Best takeaway from the lecture: “Whats the difference between a bond and a bond trader? A bond matures.” 😂😂😂

[@ravennsiregar]

🥲🤣🤣

[@andile5945]

This man is brilliant. We are very lucky. Thank you MIT for the content and the sourcing of brilliant lecturers

[@pettPette]

Why are some people saying the video is useless. The lecturer is cool, did his best to simplify key concepts. i don't think they expected him to give a rigorous/detailed lecture. chill - and enjoy!

[@jericjamespernitez392]

Six years later and this is still an amazing lecture. Thank you so much!

[@sylwek1177]

He might not have a PhD, but he is an amazing lecturer. Natural born teacher.

[@kennethabbott8248]

Thank you. I'd be a lesser teacher if I had a PhD. My value-add proposition is to explain how things are actually done.

[@marko1039]

It seems to me that he can empower people and has a lot of knowledge. So the PhD is just a title not a necessarily proof of knowledge.

[@MathSenpai]

@@kennethabbott8248 well-said!

[@Kurtosis3]

he actually has more technical knowledge about stats and econ than most of the phds out there.

[@n3fari0u56]

wonderful lecture. I can't believe this is available to general community. Thank you so much, MIT!

[@Steephhnnn]

Super interesting and informative teacher! I am a non-market risk professional at a global investment bank and loved every minute, thanks Ken hope you are well!

[@kennethabbott8248]

I am well, thank you very much. I'm glad you enjoyed it.

[@tclexi]

Excellent teaching, well done! Been through a Bachelor and now doing my Masters', never found anyone being this easy to understand.

[@kennethabbott8248]

I'm glad you liked it.

[@lavaneesh7274]

Along with explaining the concepts in simple and effective manner he gave life lessons too! Thanks a lot Sir!

[@marketmr5161]

Mit VaR course conducted by a top speicalist from the industry... Just wonderful. Great uni and high class lecturer. Props for opening the course for outsiders like me. 👍 Ty mit and Ty lecturer Ken

[@kennethabbott8248]

Happy to be of use. Let me know if you have any questions.

[@LDacic]

The stats teacher we all wish we had. Thanks for the upload, MIT.

[@StandardDeviationMusic]

45:45 that was a great insight for simplifying portfolio volatility calculations... wow

[@selorm5188]

Who is still bumping this 2019?

[@roscoeroscoe8818]

Why do you ask?

[@guillaumep2790]

Hi, I am a french student majoring in financial markets and I would have loved to have you as my teacher. You look so passionate, I envy your students. Thanks for the video!

[@muborizmirzoshoev4127]

Very informative lecture and his sense of humor is on another level of graetness.

[@sundarj8174]

This professor has an awesome way of teaching.

[@shreyaskali996]

can't believe they are having such great courses online for free! Courses are very good.

[@gj8128]

I wish this man was my mentor as I begin my journey. Great attitude and lecture.

[@kennethabbott8248]

I'm happy to provide any help I can.

[@kenanerdag5992]

@@kennethabbott8248 hi Ken ı realy need help about my life ı have to ask questions How can ı connect to you

[@kiwoongpk91]

I love that "can I have a piece of that cookie" hahahaha what a human moment

[@elaine6060]

Incredible teacher! I just started my career in Financial engineering attribute and I cant agree more that never trust the data from others!!!

[@kennethabbott8248]

Thanks.

[@kidbornbrat1812]

Same career

[@moonbull3137]

So glad I saw this. This opened my mind wide open about finances. I need to study this more

[@oscarobioha595]

I have to say a big THANK YOU to MIT for providing these lectures. Im currently doing a math/physics double major in NewZealand but I really want to become a quant. This has really opened my eyes to financial markets and the math involved. I am honestly at peace with all the mathematics as I understand most of it. For statistics however, I have done some physics labs that make the statistical concepts in this course reminiscent of the physics labs I have done but I dont know it to much detail; so i guess im gonna have to self study statistical theory.

[@salimkarakoc6787]

hey oscar ,how ıs ıt goıng your beıng quant adventure?

[@jaco6yR]

2 Years later and this is still an amazing lecture.

[@kennethabbott8248]

Thanks

[@adamfattal9602]

@@kennethabbott8248 No, thank you. Amazing lecture!!!

[@daraeloise6768]

It’s 2023 but his lecture is still useful and plus points to Mr. Abott’s quirkiness and witty jokes hahahaha

[@CautionBarrier]

I wish they had a whole lecture series with this instructor.

[@kennethabbott8248]

I do a whole lecture series every year at Baruch in the MFE program. I teach undergrads, as well. Come sit in!

[@CautionBarrier]

@@kennethabbott8248 Thanks! And thanks for the great work you put out!

[@daweili9843]

Thanks a lot to MIT and Mr. Abbott! A very lively and essential lecture.

[@krrishagarwalla3325]

his energy is infectious.

[@PhylissMoun]

Your tips help me become a better trader. Thank you very much for your time and effort!

[@mohamadternanni5955]

Very helpful for people who are trying to self study this stuff. Thank you so much for the lecture and the anecdotes.

[@kennethabbott8248]

I'm happy to be of service.

[@SPEARHEADGLOBAL]

Unbelievable ! based on this video. i passed a counterparty risk job interview.

[@kennethabbott8248]

I'm glad it was useful for you.

[@ktcd1172]

I know this is late, but this greatly helps me understand the various scenes in Margin Call where they were discussing the potential upcoming losses. Not just that they were about to lose a huge pile of cash, but how they figured out that it was about to happen. Had no real clue or understanding of what VAR numbers meant.

[@ktcd1172]

Also FORTRAN & COBOL coder using cards. USAF required that I be able to read blank Hollerith Cards at 1 card per minute, Baudot paper table at 25 characters per minute. Am another of the ancient ones.

[@Boy90547]

The instructor is very down to earth. I like it.

[@crypticsgamer]

So relaxing to hear everyone coughing, miss these old days

[@MrAsardi]

somebody give this guy one more cookie!!!!

[@lochestnut]

XD

[@mmitbitw]

post more videos of Mr. Abbott

[@jef922002]

if all my lecturers were as good as you, i would be going to every lecture happily

[@arpitjain3430]

What an attitude....cool nerd!! Need more teachers like him

[@doc_lenz]

This man is amazing. I would be honored to work with him.

[@ntuigideon1871]

Wao. This is an awesome lecture on risk management. I love your sense of humor. Thank you sir.

[@kennethabbott8248]

Thanks. My wife thinks I'm just ok, though.

[@p.c.w5877]

me still watching this video in 2024...

[@Cheesecake99YearsAgo]

😂

[@alexlee3402]

Me toooooo

[@financeexplainedgraphics]

All, there is an error on slide 40. The formula for the portfolio variance should be: =MMULT(MMULT(A2:C2,E2:G4),TRANSPOSE(A2:C2)) then ctrl+shift+enter. Despite the small error, spectacular video, thanks for posting MIT! Kenneth Abbott, you are a great teacher, thanks for sharing your knowledge!

[@financeexplainedgraphics]

@Ken Abbott Haha, totally understand. Would you mind sending me your email? Would really appreciate having a contact like yourself for topics like this. Best!

[@kennethabbott8248]

abbottk (at) post (dot) harvard (dot) edu.

[@Macuyiko]

"Are you taking something for that?" Me watching this in 2021.....

[@berdore]

Thank you for making this available to everyone.

[@yeiyei84]

This lecture and the lecturer are amazing! Thanks for sharing it.

[@Hank-ry9bz]

i never seen a stat finance professor funny enough to have his own sitcom, i tell u wat

[@treepeenbawlz1934]

Way better than LSE finance lectures

[@allancontaoi933]

The lecturer is so good

[@andreamarkos]

I guess I will be able to replicate it myself, thanks Mr Kenneth for the keys of the KINGDOM

[@soukainaiguansad8247]

(2020) thank you so so much for all those explanations ❤️

[@kennethabbott8248]

I'm glad you found it to be of use.

[@nerazzurro1234]

Slide 23 - there is something maybe wrong there? Cause if first says that Credit Spread takes recovery into consideration. Then it's said that PV01 = CSPV01 only if recovery = 0. I think this is not the case (if we define credit spread as considering the LGD as well: in this case any 1bs change in both risk-free rate and Credit Spread will result in a same PV01 = CSPV01. Can anyone check this?

[@kennethabbott8248]

It's a fair point, but I think you mean PV01=CSPV01 IFF LGD=0, not recovery. I have wrestled with this issue for many years.

[@badoubachou3513]

Thanks MIT ...Harvard you should take example of thé best education non profit approch

[@iraqimusiclover8777]

I wish attending one of your great, rich and well presented classes, great work

[@anuragagrawal3187]

The Cornish-fischer expansion technique is also very useful and practical for VaR

[@summaalchemica364]

This guy is hilarious, and doesn't use jargon. Keeps it very close to application and explains things well.

[@MadridistaUlle]

0:31:53 Crazy... 9 years later and negative yields are common all around the world

[@abioduntaiwo8443]

Thanks for this video it gave me the basic background I need to understand VaR in my Financial Engineering Module.

[@jaybariya9]

Thanks Prof. Kenneth for this amazing lecture!

[@sve2727]

Goid vid. Like the experience and not theory perspective of bad data.

[@sandyjr5225]

Fantastic, fantastic lecture.

[@kennethabbott8248]

I'm glad you liked it.

[@sandyjr5225]

@@kennethabbott8248 Mr. Abbott, where can I find related papers/journals from which I can read more about VAR, Portfolio, Options, Derivatives, etc related to finance? I believe that getting a good in-depth know-how of these things would be beneficial in the long run, atleast for me.

[@mberoakoko24]

This is a cool lecturer , when I get money , I will donate.

[@IAP_mkt]

What's the difference between a bond and a bond trader? The bond matures

[@银河搞钱指南]

very well explained！ though he jumped too fast about the details of how he constructed the mcs. The core is to use the portfolio correlation matrix's sign vector and eign value to transform normal distributed data to be the same distribution as the portfolio correlation. Then we can generate as many as fake data as we want to simulate what's going on in the worst case.

[@银河搞钱指南]

@Ken Abbott lol yeah totally understood! The proof is easy and will be leave as an exercise, said by professor

[@oscarobioha595]

The guy coughing at 29:03 reallllly pissed me off lol

[@firstal3799]

Good. I am ready to play my part in next financial crisis now.

[@rutgerolsen848]

I love this guy, at 50.10 he had me dying laughing. Kenneth I will bring you an entire box of cookies to come sit in on one of your lectures.

[@kennethabbott8248]

Let me know when you're in NYC. You can sit in.

[@Valkush]

​@@kennethabbott8248, Great lecture! definitely useful even not for quants (CS grad from Israel here)

[@HelloThisIsAnon]

@@kennethabbott8248 Sorry but at 52:15 that bit about Abe Lincoln and the Internet just fell completely flat 😂

[@kennethabbott8248]

@@HelloThisIsAnon Yeah. That one didn't go over.

[@mohammedouallal2]

I have spent so many years at several universities, I have never seen something like thatbefore!! I laughed out loud! That was genuinely funny!!!

[@kpatel306]

Hi There Lecture is really very good as it is presented by experience quant. Is there any possibility to get the Excel spreadsheet presented by Kenneth? Thanks, KP

[@mitocw]

Krunal Patel Sorry, the course materials do not include any Excel spreadsheets... but the course lectures notes do have a number of data tables on the slides that might be of some help? See the course on MIT OpenCourseWare for the course materials at: ocw.mit.edu/18-S096F13

[@FelipeMontealegreS]

This has over 450,000 views. Ken Abbott, there is a lot of demand for an entire course if you are up for it!

[@kennethabbott8248]

I've been teaching this material as part of a risk for many years. I now teach it at Baruch and Claremont and co-teach it at NYU.

[@DivineAffection]

What an amazing teacher. Great lecture

[@andreamarkos]

Please: how to do the final transformations in order to obtain the correlated synthetic data! A practical explanation of that would be most useful! Thank you for this video.

[@cristianozanotti968]

This might be useful: kzbin.info/www/bejne/h3TUpH2MiJ2ja6M

[@behrouzraftari3044]

A true teacher, awesome indeed!

[@kennethabbott8248]

Thanks.

[@EvanEvansE3]

You can use polar coordinates for correlation

[@jellyjams7217]

Can I have a piece of your cookie - this guy is a legend

[@anish3240]

Watching this in 2020 while in iso

[@whatitmeans]

Does somebody have the link to the spreadsheet with his Monte Carlo simulations?

[@moosecapital8886]

Amazing lecture! Thanks MIT Just one thing, what he said at 0:28:45, "the likelihood of a move [in a fat tailed distribution] of 2.33 SD is more than 1%". Isn't it the other way around? It's fewer observations outside of 2.33 SDs in a fat tailed distribution than it is in a normally distributed.

[@kennethabbott8248]

No. Leptokurtosis implies a higher probability of larger losses.

[@moosecapital8886]

​@@kennethabbott8248 Doesn't that depend on how the fat tailed distribution look? The probability for a extremely large loss are indeed higher in a fat tailed distribution. But it can still be more likely for a 2,33 sigma loss in a normal. For example, 2 distributions, one normal and one fat tailed with the same mean and variance. Both have 1000 observations. In the normal it will be approx 10 events outside 2,33 sigma, but in the fat tailed it can in the extreme case be 1. If that observation is far enough out in the tail, like 15-20 sigma, then the distributions can still have the same variance. Thus the probability of a 2,33 sigma loss is smaller in the fat tailed. Or am I missing something?

[@kennethabbott8248]

@@moosecapital8886 Technically, of course, you are correct. The fact that the two cumulative distribution functions cross each other demands that they cross a second time since both of the associated density functions must integrate out to 1.0. In practice, in a diversified portfolio, the VaR at 99% and 95% are always higher for HS than for VCV or MC. (At least I have never seen any instances of an empirical VaR at these levels be less that that implied by the normal.) Ive seen the crossover between 80% and 95%, typically around 90%. My $0.02.

[@moosecapital8886]

@@kennethabbott8248 That makes sense, thanks a lot for the reply Kenneth. Really enjoyed the lecture

[@nadekang8198]

47:38 that position vector should be read a column vector in order to conduct x'Ex..otherwise if some people read it as a row vector, you can't do x'Ex because (nx1) cannot multiply a (nxn) matrix..

[@kennethabbott8248]

Yes. That is correct.

[@nadekang8198]

@@kennethabbott8248 Thanks Ken. I wish there would be your 8-hour course! I learned a lot from your condensed lecture!

[@KurtDarmanin]

This lecture is amazing

[@hahahat47]

everytime there is a lecture,the same old professor will be seating in the seats,he must like studying a lot

[@adstub]

All you guys praising MIT, All this course content is also available by other sources.

[@Patrick-li8nh]

He has a serious problem with Mother Theresa huh? Jokes aside, I find it a really enjoyable lecture and one of the few ones that don't need 1.5x playback. Thanks and best wishes!

[@kennethabbott8248]

Thanks. I clearly can't please everyone, but if I can make the material clearer for a few, I'm satisfied.

[@Aditya-ne4lk]

At 30:30 you mentioned graphing the data - what do you look for in the graph? If prices are true random walks then what good is graphing the data?

[@cherryzamudio560]

Excellent. I am so thankful for this video.

[@Hank-ry9bz]

should the x bar in the top eqn at 19:30 be mu? that is to say sigma^2 = E[(X_i - mu)^2]?

[@shelleywang3659]

Awesome lecture! Lucky MIT kids. I have a master degree in risk management. I have learnt almost all of the stuff, but I enjoyed it a lot! I love how it refreshes my memory and links my knowledge to practical world. And I liked the jokes haha.

[@aliphonse]

Great Content, Thank you MIT.

[@rmdfra]

Loved this class. The comments about the sign of an FX contract in the position vector really clarified some practical issues to me. By the way, is that spreadsheet on Monte Carlo avaliable somewhere? Couldn't find it in the related MIT course page.

[@randoma63939]

During Monte Carlo Simulation, is the transformation matrix supposed to be E^(T) * lambda^(1/2) or lambda^(1/2) * E^(T) ? The slide on the PPT says its the latter, whereas he writes the former on the board, and the Excel MMULT function follows the latter as well. And IIRC, I don't think both formulae would yield the same results.

[@kennethabbott8248]

I was in error. It is lambda^(1/2) * E^(T)

[@randoma63939]

Thank You for the clarification Professor. Really enjoyed your lecture. @@kennethabbott8248

[@fidelesteves6393]

About that last Monte Carlo simulation. When multiplying by normal random vectors is he underestimating the tails of the distribution? The syntetic data may conserve its standard deviation, but probably not the kurtosis (my point of view).

[@kennethabbott8248]

You are correct That is a known weakness and the reason most forms don't use MC for VaR. You can use a t-copula or make ex-post adjustments to calibrate the distribution. A gaussian copula makes more sense in doing Vasicek-type default models and counterparty risk.

[@AndreMes97]

Amazing Lecture!

[@kylemaharaj9563]

Amazing teacher

[@terrym8816]

Oh man, it ends just as things start to get super interesting. Kenneth what should I watch next??

[@kennethabbott8248]

The answer to that is usually cat videos. Where are your interests?

[@inmortal009]

what a great professor!!

[@kennethabbott8248]

Thanks

[@rohit2761]

This man is hilarious and savage

[@amonal42]

Why does he need monte-carlo simulation for tail properties? It can`t be more accurate than analytical formula. I wana see more math, not the presentation.

[@leylahz2505]

Thank you! I could listen to you for ages! :)

[@kennethabbott8248]

My wife says I'm only "better than average". That's all I got after 25 years I guess. KA

[@chaztikov]

@@kennethabbott8248 Hahaha after 25 years that's pretty damn good!!! I've only been able to make it to 5, and my fiancee dropped my course...(then me...)

[@rohitjain4124]

please anybody give cough syrup to that student

[@mousquetaire86]

Great lecture, Mr Abbott! Have a cookie!

[@clifftanch]

At BT, if Risk Mgt hadn’t had the full support of Charlie Sanford, I doubt the group would have grown as much. You need this for genuine risk mgt to thrive.

[@kennethabbott8248]

Charlie was a big supporter.

[@clifftanch]

@@kennethabbott8248 You prob should have given Dan Mudge a shoutout, too. 👍