Advantages & Disadvantage
- Unlike Parametric VaR, it uses full pricing models and can therefore capture the effects of nonlinearities.
- Unlike Historical VaR, it can generate an infinite number of scenarios and therefore test many possible future outcomes.
- The calculation of Monte Carlo VaR can take 1,000 times longer than Parametric VaR because the potential price of the portfolio has to be calculated thousands of times.
- Unlike Historical VaR, it typically requires the assumption that the risk factors have a Normal distribution.