What is Profit-at-Risk (PaR)?
Profit-at-Risk (PaR) is an
expression used to mean several slightly different things by different segments
of the industry. PaR, as used at ART, refers to an entire analysis
process/philosophy. The basic idea is to produce
simulations (forward and backward) of entire trading strategies, including
all rebalances, market dynamics, operational issues/costs (e.g. transaction
costs, liquidity, credit, etc.), to produce distributions of risk- and
capital-adjusted P&L or returns. That is, simulate as much or
sufficient degree of the real world trading environment over the entire
holding period to see how your strategy would really perform.
In addition, these performance
results may then be used further, possibly in conjunction with Efficient
Frontier-like (EF) optimisation methods, to select strategies that provide
"optimal" performance for "your" risk/return profile and mandate.
In practice, the EF-like approaches require certain sophistications to make
them sensible for real world optimal trading strategy selection.
In short, at ART, PaR means
comprehensive/optimal holding period risk-adjusted P&L based trading
This type of PaR is introduced in
A Traderís Guide to Ö The Series -
Read Me First!
"Part I and Part II",
A Traderís Guide to Quantitative Methods (Donít
Maths & Stats,
and detailed (including a working PaR
[3.a] A Traderís Guide to Quantitative Methods
Monte Carlo Methods
and used extensively in all of the TG2
"trading" books. Look here [ALL
titles with " - Trading," or "Ė Vol2: Trading & Position Keeping," in their
titles. "Snapshots" of PaR and its application can be seen in the
In other places, PaR may mean
something different. For example, in energy trading, PaR is used to
mean something less robust compared to PaR as is used here (e.g. no
rebalances etc.). Of
critical importance, PaR is NOT Value-at-Risk (VaR). In a sense, VaR
is a trivial sub-case of PaR, since VaR is very short term, does not consider
rebalances/strategies, or indeed many real world effects, and there is certainly no
attempt in VaR to asses risk-adjusted performance that optimally suits your
Remember, though PaR is very
comprehensive and very sophisticated, use the right tool for the right job.
Building/buying PaR machinery can be non-trivial, so be sure that the cost of
implementation is consistent with your mandate (see  - [3a] above).