## Value at Risk (VaR) is a widely used risk measure in finance that quantifies the potential

# loss of an investment or portfolio over a specified time horizon and at a given confidence level.
# It provides a single number that represents the maximum loss an investor can expect to experience
# under normal market conditions. VaR is an essential tool for risk management, portfolio optimization,
# and regulatory compliance.

# In this tutorial, we will explore the concept of VaR and learn how to calculate it using Python.
# We will start by understanding the theory behind VaR, then move on to implementing different VaR calculation
# methods. We will use real financial data to demonstrate the calculations and visualize the results.

# Table of Contents
# Understanding Value at Risk
# Historical VaR
# Parametric VaR
# Monte Carlo VaR
# Comparing VaR Methods
# Conclusion

## 1. Understanding Value at Risk

# Value at Risk (VaR) is a statistical measure that estimates the potential loss of an investment
# or portfolio over a specified time horizon and at a given confidence level. It provides a way to quantify
# the downside risk of an investment and helps investors make informed decisions about risk management
# and portfolio allocation.

# VaR is typically expressed as a negative dollar amount, representing the maximum loss an investor can expect
# to experience with a certain level of confidence. For example, a VaR of $1 million at a 95% confidence level
# means that there is a 5% chance of losing more than $1 million over the specified time horizon.

## 2. Historical VaR

# Historical VaR is a non-parametric method that uses historical price data to estimate the potential
# loss of an investment or portfolio. It assumes that future returns will follow the same distribution
# as past returns and calculates VaR based on the historical distribution of returns.

# To calculate Historical VaR, we need a time series of historical prices for the asset or portfolio
# we are interested in. We can obtain this data using the yfinance library, which allows us to download
# financial data for real assets.
# Let’s start by installing the yfinance library:
# pip install yfinance

# Now, let’s import the necessary libraries and download the historical price data for a specific asset.
# For this example, we will use the stock price data for JPMorgan Chase & Co. (JPM) from January 1, 2010,
# to mars, 2024.

import yfinance as yf
import numpy as np
import pandas as pd
import matplotlib.pyplot as plt

# Download historical price data

data = yf.download("JPM", start="2010-01-01", end="2024-03-31")

# Calculate daily returns

data["Returns"] = data["Close"].pct_change()

# Now that we have the historical price data, we can calculate the daily returns. Daily returns are calculated
# as the percentage change in price from one day to the next.

# Calculate daily returns

data["Returns"] = data["Close"].pct_change()

# Next, we can calculate the VaR using the historical returns. The VaR at a specific confidence level
# is the negative value of the nth percentile of the historical returns, where n is determined
# by the confidence level. For example, to calculate the VaR at a 95% confidence level, we need to find
# the value below which 5% of the historical returns fall.

# Calculate VaR
confidence_level = 0.95
var = -np.percentile(data["Returns"].dropna(), (1 - confidence_level) * 100)

# Finally, let’s visualize the VaR using a histogram:

# Plot histogram of returns

plt.hist(data["Returns"].dropna(), bins=50, density=True, alpha=0.7)

# Plot VaR line

plt.axvline(x=var, color="red", linestyle="--", linewidth=2)

# Add labels and title

plt.xlabel("Returns")
plt.ylabel("Frequency")
plt.title(f"Historical VaR at {confidence_level * 100}% Confidence Level: {var:.2%}")
# Show the plot
plt.show()

/Users/abdelkarimabdallah/anaconda3/lib/python3.11/site-packages/pandas/core/arrays/masked.py:60: UserWarning:
Pandas requires version '1.3.6' or newer of 'bottleneck' (version '1.3.5' currently installed).
from pandas.core import (
/Users/abdelkarimabdallah/anaconda3/lib/python3.11/site-packages/yfinance/utils.py:775: FutureWarning: The 'uni
t' keyword in TimedeltaIndex construction is deprecated and will be removed in a future version. Use pd.to_time
delta instead.
df.index += _pd.TimedeltaIndex(dst_error_hours, 'h')
[*********************100%%**********************] 1 of 1 completed

## 3. Parametric VaR

# Parametric VaR is a method that assumes the returns of an asset or portfolio follow a specific distribution,
# such as the normal distribution. It uses statistical techniques to estimate the parameters
# of the distribution and calculates VaR based on these parameters.

# To calculate Parametric VaR, we need to make certain assumptions about the distribution of returns.
# The most common assumption is that returns follow a normal distribution. Under this assumption,
# we can estimate the mean and standard deviation of returns and use them to calculate VaR.

# Let’s calculate Parametric VaR using the same historical price data for JPMorgan Chase & Co. (JPM) as before.
# We will assume that returns follow a normal distribution.

# Calculate mean and standard deviation of returns

mean = data["Returns"].mean()
std = data["Returns"].std()

# Calculate VaR
var = -mean - std * np.percentile(np.random.normal(size=10000), (1 - confidence_level) * 100)

# We can visualize the Parametric VaR using a histogram, similar to the Historical VaR example:

# Plot histogram of returns

plt.hist(data["Returns"].dropna(), bins=50, density=True, alpha=0.7)

# Plot VaR line

plt.axvline(x=var, color="red", linestyle="--", linewidth=2)

# Add labels and title

plt.xlabel("Returns")
plt.ylabel("Frequency")
plt.title(f"Parametric VaR at {confidence_level * 100}% Confidence Level: {var:.2%}")

# Show the plot

plt.show()

# The histogram represents the distribution of daily returns, and the red dashed line represents the VaR
# at the specified confidence level. The Parametric VaR provides an estimate of the potential loss that can be
# expected with a certain level of confidence, assuming returns follow a normal distribution.
# 4. Monte Carlo VaR

# Monte Carlo VaR is a simulation-based method that generates multiple scenarios of future returns
# and calculates VaR based on these scenarios. It does not make any assumptions about the distribution
# of returns and can capture non-linear relationships and complex risk factors.

# To calculate Monte Carlo VaR, we need to simulate future returns based on historical data. We can use
# the mean and standard deviation of historical returns to generate random scenarios of future returns.
# Let’s calculate Monte Carlo VaR using the same historical price data for JPMorgan Chase & Co. (JPM) as before.

# Set the number of simulations

num_simulations = 10000

# Generate random scenarios of future returns

simulated_returns = np.random.normal(mean, std, size=(len(data), num_simulations))

# Calculate portfolio values for each scenario

portfolio_values = (data["Close"].iloc[-1] * (1 + simulated_returns)).cumprod()

# Convert portfolio_values into a DataFrame

portfolio_values = pd.DataFrame(portfolio_values)

# Calculate portfolio returns for each scenario

portfolio_returns = portfolio_values.pct_change()

# Calculate VaR
if len(portfolio_returns.iloc[-1].dropna()) > 0:
var = -np.percentile(portfolio_returns.iloc[-1].dropna(), (1 - confidence_level) * 100)
else:
var = 0

## We can visualize the Monte Carlo VaR using a histogram, similar to the previous examples:

# Plot histogram of portfolio returns

plt.hist(portfolio_returns.iloc[-1].dropna(), bins=50, density=True, alpha=0.7)

# Plot VaR line

plt.axvline(x=var, color="red", linestyle="--", linewidth=2)

# Add labels and title

plt.xlabel("Portfolio Returns")
plt.ylabel("Frequency")
plt.title(f"Monte Carlo VaR at {confidence_level * 100}% Confidence Level: {var:.2%}")

# Show the plot

plt.show()

# The histogram represents the distribution of portfolio returns based on the simulated scenarios,
# and the red dashed line represents the VaR at the specified confidence level. The Monte Carlo VaR provides
# an estimate of the potential loss that can be expected with a certain level of confidence, considering
# the non-linear relationships and complex risk factors

/var/folders/18/sbrpvhfj1mj55h_nf1msrh4m0000gn/T/ipykernel_2097/1105093069.py:19: RuntimeWarning: overflow enco

untered in accumulate
portfolio_values = (data["Close"].iloc[-1] * (1 + simulated_returns)).cumprod()
 ### 5. Comparing VaR Methods

# Now that we have calculated VaR using three different methods, let’s compare the results and see how
# they differ.

# Calculate VaR using all three methods

historical_var = -np.percentile(data["Returns"].dropna(), (1 - confidence_level) * 100)
parametric_var = -mean - std * np.percentile(np.random.normal(size=10000), (1 - confidence_level) * 100)
if len(portfolio_returns.iloc[-1].dropna()) > 0:
monte_carlo_var = -np.percentile(portfolio_returns.iloc[-1].dropna(), (1 - confidence_level) * 100)
else:
monte_carlo_var = 0

# Print the VaR values

print(f"Historical VaR: {historical_var:.2%}")
print(f"Parametric VaR: {parametric_var:.2%}")
print(f"Monte Carlo VaR: {monte_carlo_var:.2%}")

# As we can see, the VaR values calculated using different methods are slightly different.
# This is because each method makes different assumptions and approximations. It is important to understand
# the limitations and assumptions of each method when interpreting the VaR results.

Historical VaR: 2.60%

Parametric VaR: 2.84%
Monte Carlo VaR: 0.00%

## 6. Conclusion

# In this tutorial, we have explored the concept of Value at Risk (VaR) and learned how to calculate
# it using Python. We have implemented three different VaR calculation methods: Historical VaR, Parametric VaR,
# and Monte Carlo VaR. We have used real financial data to demonstrate the calculations and visualize
# the results.
# VaR is a powerful tool for risk management and portfolio optimization. It provides a quantitative measure
# of the potential loss an investor can expect to experience under normal market conditions. However,
# it is important to note that VaR has its limitations and should be used in conjunction with other risk
# measures and risk management techniques.

# By understanding and applying VaR, investors can make informed decisions about risk management, portfolio
# allocation, and regulatory compliance. Python provides a flexible and efficient environment
# for VaR calculations, allowing investors to analyze and manage risk effectively.
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