When it is a post from you or the other, I always hate to intervene, because you take things very personal, but I also hate to see things the wrong way…
VaR 5 doesn’t mean replication of 2.
VaR is variable between 5 and 10%, so personal VaR of 5% doesn’t mean that investors’ VaR is at 10%.
Also, as personal VaR goes down, investors’ VaR tends to 5%.
In my personal opinion, this is the correct list:
VaR 5 - Replication from 1 to 2
VaR 3 - Replication from 1.67 to 3.3 (I think 3.3 is already impossible with a variable VaR)
VaR 2 - Replication 2.5
VaR 1 - Replication 5
VaR 0.5 - Replication 10
I think personal VaR should not be touched. It is the trader that decides how to operate and if his strategy achieves a low VaR, it’s his business and investors should be aware of the effects.
In another post, I proposed a variable VaR in a range 4-12%.
I think, in that case, the list would be much more flexible:
VaR 5 - Replication from 0.8 to 2.4
VaR 3 - Replication from 1.33 to 4 (again, I think 4 is only a theoretical case with this system of the VaR)
VaR 2 - Replication 2
VaR 1 - Replication 4
VaR 0.5 - Replication 8
Also, I want to add that having a wider range is positive, not negative.
It may look like having a wider range, the multiplier is changing even more frequently, but it’s the opposite.
Consider a trader with a personal VaR at 4% and a current multiplier of 2, so investors’ VaR is at 8%.
With the current 5-10% VaR, the multiplier will always be 2, unless investors’ VaR goes above 10% or below 5%.
This means that investors will always follow the same curve as the trader, unless personal VaR for the trader goes below 2.5% or above 5%.
In case of a range 4-12%, investors’ will always follow the same curve, unless personal VaR goes below 2% or above 6%.
This guarantees more room for investors to continue to follow the same activity as the trader, without having to change the risk too soon and give space to luck.
In the case we have experienced in March, personal VaR at 4% could have gone to 5% in even a couple of days, without allowing the trader to figure out what to do to stop the multiplier to go down. I think that that extra 1% given by the range I’m proposing, would have been very handy for the trader to think about what to do before seeing the multiplier going down from one day to another.