What is the minimum number of simulations that should be run in Monte Carlo VAR?
I know that one major bank uses 500 simulations for its Monte Carlo VaR. Again, the answer depends on the complexity of the portfolio. Linear instruments, fewer simulations. But MC has its own peculiarities that affect accuracy. For example, some MC routines use “variance reduction.” These are “tricks” used to improve accuracy for a given simulation size. With variance reduction techniques (e.g., Antithetic Variates), the fewer simulations needed for a given accuracy. Remember that underlying every MC is some distribution from which observations of market rates are sampled. So assumptions about the distribution and shortcuts taken to reduce the “dimensionality” of the distribution will also have a cost in accuracy which should require more simulations for a given level of accuracy.
