Adjusting VaR Returns for Stock Splits

Summary

A stock split changes the quoted share price without creating an equivalent economic loss. If raw prices are used to calculate returns, the split can appear as a sharp price movement, distort volatility estimates, and inflate a variance-covariance VaR calculation. The document recommends using split-adjusted historical prices so the series reflects a consistent number of shares across the corporate action.

It also stresses that covariance should be estimated from returns, such as log returns, rather than directly from price levels. Returns capture the relative movements and co-movement of assets relevant to the risk calculation. The explanation is brief and focuses on stock splits; it does not discuss adjustment procedures for other corporate actions, data-provider differences, or VaR model validation.

Key ideas

• Adjust historical prices for stock splits so the time series represents a consistent share basis.
• Use returns rather than price levels when estimating covariance for VaR.
• An unadjusted split can create a spurious return and distort volatility and VaR estimates.

Tags

# How to adjust corporate actions for VaR


# How to adjust corporate actions for VaR












I am using variance co variance matrix for calculating the VaR. Now if the some corporate action comes in between like stock split, resulting a huge VaR number on that particular day as the volatility will drop by huge amount.

For instance, if a stock price series is $\$10, \$10.25, \$10.28, \$10.54, \$10.98, \$11.65, \$11.65$ and so on for the last 1 year and suddenly the stock split comes in between and the prices drops to around $\$5$, resulting in huge volatility and thus impacting my VaR number. How to adjust this as to my VaR numbers looks in synchronization?

Thanks in advance.

## Answer by Jan Sila (score 1, accepted)

https://quant.stackexchange.com/a/28425

The prices need to be recalculated for 'Adjusted Close'. You basically split or the prices backwards so they correspond to the same number of shares...also when computing a covariance matrix, you need to do it with returns (log returns), not prices!

The comovement you want to capture is in returns of the series.

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