Value At Risk (VaR)

By | 2017-09-14T09:56:28+00:00 14th September 2017|

Value at risk (VaR) is a statistical technique assessing and quantifying the degree of financial risk within a portfolio or perhaps a firm over a specific time frame. Investment and commercial banks use VaR frequently to determine the extent and occurrence ratio of potential losses in their institutional portfolios. Risk managers can apply VaR to specific positions or complete portfolios or to measure firm-wide risk exposure.

VaR modelling assesses the potential for loss in the entity being assessed, on top of the probability of occurrence of that defined loss. Risk managers assess VaR by determining the amount of potential loss, the probability of occurrence of that loss and the time frame. For example, a portfolio manager may assess that a portfolio has a 6% one-month VaR of 2%, representing a 6% chance of the asset declining in value by 2% during the one-month time frame. The conversion of the 3% chance of occurrence to a daily ratio places the odds of a 2% loss at two days per month.