Computing VaR and CVaR using stochastic approximation and adaptive unconstrained importance sampling

Abstract Value-at-Risk (VaR) and Conditional-Value-at-Risk (CVaR) are two risk measures which are widely used in the practice of risk management. This paper deals with the problem of estimating both VaR and CVaR using stochastic approximation (with decreasing steps): we propose a first Robbins–Monro (RM) procedure based on Rockafellar–Uryasev's identity for the CVaR. Convergence rate of this algorithm to its target satisfies a Gaussian Central Limit Theorem. As a second step, in order to speed up the initial procedure, we propose a recursive and adaptive importance sampling (IS) procedure which induces a significant variance reduction of both VaR and CVaR procedures. This idea, which has been investigated by many authors, follows a new approach introduced in [Lemaire and Pagès, Unconstrained Recursive Importance Sampling, 2008]. Finally, to speed up the initialization phase of the IS algorithm, we replace the original confidence level of the VaR by a slowly moving risk level. We prove that the weak convergence rate of the resulting procedure is ruled by a Central Limit Theorem with minimal variance and its efficiency is illustrated on several typical energy portfolios.