The StressVaR: A New Risk Concept for Superior Fund Allocation

Understand

In this paper we introduce a novel approach to risk estimation based on nonlinear factor models - the "StressVaR" (SVaR).

• Developed to evaluate the risk of hedge funds, the SVaR appears to be applicable to a wide range of investments.
• Its principle is to use the fairly short and sparse history of the hedge fund returns to identify relevant risk factors among a very broad set of possible risk sources.
• This risk profile is obtained by calibrating a collection of nonlinear single-factor models as opposed to a single multi-factor model.