Investment risk management in Tehran Stock Exchange (TSE) using technique of Monte Carlo Simulation (MCS)

Abstract

PurposeThe purpose of this paper is to try to show how to manage risk by the use of “value at risk (VaR) concept” with Monte Carlo Simulation (MCS) technique in stock exchanges.Design/methodology/approachThe paper uses MCS technique in calculation of VaR in different set of stock portfolio, so that the risk inherent in the portfolio while making decision about investment in stock market could be estimated.FindingsThe paper specifies which equity stocks have been more affected on VaR in set of portfolio and which equity stocks are lesser affected. In addition, the main result which is derived by the research shows that if there is a loss at future, what is max the loss at the level confidence which could be imposed by investors. Thus, the paper suggests how the investors can invest their capital so that they would minimize their loss and maximize their profit.Practical implicationsBy using concept of VaR calculated by MCS, the investors would be in a position to select better stock portfolio with a known risk measure.Originality/valueThis paper tries to manage risks by use of “VaR concept,” which could be calculated by MCS technique.