Morgan Stanley 2009 Annual Report Download - page 99

VaR Statistics under Varying Assumptions.
VaR statistics are not readily comparable across firms because of differences in the breadth of products included
in each firm’s VaR model, in the statistical assumptions made when simulating changes in market factors, and in
the methods used to approximate portfolio revaluations under the simulated market conditions. The extreme
market volatilities in the latter part of 2008 had a significant impact on VaR in 2009. The impact varies
depending on the factor history assumptions, the frequency with which the factor history is updated and the
confidence level. As a result, VaR statistics are more reliable and relevant when used as indicators of trends in
risk taking rather than as a basis for inferring differences in risk taking across firms.
Table 2 presents the VaR statistics that would result if the Company were to adopt alternative parameters for its
calculations, such as the reported confidence level (95% versus 99%) for the VaR statistic or a shorter historical
time series (four-year versus one-year) for market data upon which it bases its simulations. Both the average
four-year VaR and the average one-year VaR for 2009 are sensitive to the high market volatilities experienced in
the fourth quarter of 2008. However, we expect the one-year VaR to decline relative to the four-year VaR in the
coming months, as the highly volatile period in the fourth quarter of 2008 will remain in the four-year VaR, but
will no longer be a factor in the one-year VaR.
Table 2: Average 95% and 99% Trading VaR
with Four-Year/One-Year Historical Time Series
Average 95%/One-Day VaR for
2009
Average 99%/One-Day VaR for
2009
Primary Market Risk Category
Four-Year
Factor History
One-Year
Factor History
Four-Year
Factor History
One-Year
Factor History
(dollars in millions)
Interest rate and credit spread ................... $105 $134 $218 $ 248
Equity price ................................. 21 26 31 38
Foreign exchange rate ......................... 20 35 41 62
Commodity price ............................ 24 30 43 62
Less: Diversification benefit(1) ................. (51) (63) (97) (138)
Trading VaR ................................ $119 $162 $236 $ 272
(1) Diversification benefit equals the difference between Total VaR and the sum of the VaRs for the four risk categories. This benefit arises
because the simulated one-day losses for each of the four primary market risk categories occur on different days; similar diversification
benefits also are taken into account within each category.
95