What is EWMA_RiskMetrics() ?
EWMA_RiskMetrics() is an open source software that can evaluate a financial istrument's risk given its historical data, more specifically can compute its associated Value at Risk (VaR) and Expected Shortfall (EF).
What does EWMA_RiskMetrics() mean?
EWMA means Exponential Weighted Moving Average an it's a mathematical formula used to compute volatility that is at the core of the software, RiskMetrics™ is a set of techniques and data to measure market risks in portfolios developed by JPMorgan and Reuters, 1996. Thus, this project is firstly an implementation of some of the RiskMetrics™ techinques on the statistical programming language R, and moreover is an easy-to-use software that adopts these techinques to evaluate market risks on a financial istrument.
How does EWMA_RiskMetrics() work?
EWMA_RiskMetrics() is based on very complicated mathematics/informatics and won't be fully explained here. Nonetheless, here are the main steps followed by the software:
- Given some financial instruments code (like "IBM", "AAPL", ..) it downloads from yahoo.finance their historical data and creates a database.
- The data are used to create a model (with the EWMA formula) of the returns' volatility.
- Given the estimated volatility are computed with 3 different methods and 4 different confidence level the risks (VaR) associated with the instrument.
- Risks (VaR) are thus tested to verifiy their coherence with the historical data (binomial test and associated p-value)
- The software determines the more statistically evident risk level and returnes it as output.
How can I know more about EWMA_RiskMetrics()?
You can visit the project page on GitHub to have a look at the code and propose your contribution, or you can visit the documentation page to get a view on its techincal aspects.
Contact and Reference
The project has been developed by Alessandro Solbiati, Head of the IT Department at Investment Club Milano. Email at alessandro.solbiati@investmentclubmilano.com