How the portfolio/positions mapping is done to calculate VAR at regular investment banks?

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Hello,

To calculate VAR of large portfolios such as those of regular banks, study materials mention a few ways such as mapping to smaller numbers of risk factors, but what is ACTUALLY done?

Do they really do that? Given non-linear nature of many of their portfolios, it doesn't seem to make sense.
Do they calculate VAR for the smallest entity such as a book and add them up to a higher level by assuming correlation among them? This will be easier but, theoretically, can introduce inconsistent correlations implicitly since many of them contain the same instruments.

This is a typical problem I see when studying FRM. They explain with a very simplified and idealized case and mentioned a few alternatives or improved ways without giving any real world information. If anyone can help me on understanding, I would be really appreciated.

Also can anyone also tell me how "real" risk budgeting process work?
Do they allocate VAR only or other measures?

Many thanks!

 

[Edgar Oropesa]

Hi Monooki99

Your question is very interesting and if you have already received some feedback I would appreciate that you share it with me. In fact, I’ve also wondered how do banks for estimating one measure of Var for all positions, including several assets class. I think a historical method could be useful for estimating a daily Var but I hardly imagine how to get daily information for all positions. I would like to have the opportunity to discuss with someone working in a risk management unit of a banc. I’m a quantitative analyst who is much more involved in market risk of portfolio of stocks. I just passed the FMR level II thanks to David Harper and it’s videos, papers and Excel Sheets. I recommend everyone who wants to get deeper knowledge and practical implementation skills of risk measurement strategies to become David costumer

Sincerely yours
Edgar Oropesa