Value at risk: Difference between revisions
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''Risk management and measurement.'' | |||
(VaR). | (VaR). | ||
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<span style="color:#4B0082">'''Example'''</span> | |||
If weekly VaR is assessed as €250,000 at a 95% level of confidence, it means we are 95% confident that cumulative net losses for any one week will not exceed €250,000. | |||
So the probability that weekly losses will exceed €250,000 is 5%, according to the VaR assessment. | So the probability that weekly losses will exceed €250,000 is 5%, according to the VaR assessment. | ||
The specified time period is commonly the planned holding period, or else the time lag before the holder of the position could normally respond to close out their loss-making position. | The specified time period is commonly the planned holding period, or else the time lag before the holder of the position could normally respond to close out their loss-making position. | ||
VaR is regularly used as a tool to define and manage risk appetite. | |||
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It is sometimes written as 'Value at Risk'. | It is sometimes written as 'Value at Risk'. | ||
Value at risk concepts can be applied to any financial measure. | |||
Common examples include cash flow at risk and earnings at risk. | |||
== See also == | == See also == | ||
* [[ | * [[Beta]] | ||
* [[Cash flow at risk]] | |||
* [[Correlated value at risk]] | * [[Correlated value at risk]] | ||
* [[Correlation]] | |||
* [[Delta-normal method]] | * [[Delta-normal method]] | ||
* [[Earnings at risk]] | |||
* [[Frequency distribution]] | * [[Frequency distribution]] | ||
* [[Hedging]] | |||
* [[Historical simulation method]] | * [[Historical simulation method]] | ||
* [[Incremental VaR]] | * [[Incremental VaR]] | ||
* [[Leptokurtosis]] | * [[Leptokurtosis]] | ||
* [[Marginal VaR]] | * [[Marginal VaR]] | ||
* [[Mean deviation]] | |||
* [[Monte Carlo method]] | * [[Monte Carlo method]] | ||
* [[Risk ]] | |||
* [[Risk appetite]] | |||
* [[Risk measurement]] | |||
* [[Standard deviation]] | * [[Standard deviation]] | ||
* [[Variance]] | |||
* [[Variability]] | |||
* [[Volatility]] | |||
[[Category:Risk_frameworks]] | [[Category:Risk_frameworks]] |
Latest revision as of 12:00, 13 March 2023
Risk management and measurement.
(VaR).
Value at risk quantifies risk by estimating a maximum likely adverse change, within a specified time period, with a specified level of confidence.
A common application is the maximum likely loss on a market position, before the position can be closed out.
VaR is expressed as an amount of money, for example €.
Example
If weekly VaR is assessed as €250,000 at a 95% level of confidence, it means we are 95% confident that cumulative net losses for any one week will not exceed €250,000.
So the probability that weekly losses will exceed €250,000 is 5%, according to the VaR assessment.
The specified time period is commonly the planned holding period, or else the time lag before the holder of the position could normally respond to close out their loss-making position.
VaR is regularly used as a tool to define and manage risk appetite.
Value at risk is sometimes abbreviated as 'VAR', rather than 'VaR'.
It is sometimes written as 'Value at Risk'.
Value at risk concepts can be applied to any financial measure.
Common examples include cash flow at risk and earnings at risk.
See also
- Beta
- Cash flow at risk
- Correlated value at risk
- Correlation
- Delta-normal method
- Earnings at risk
- Frequency distribution
- Hedging
- Historical simulation method
- Incremental VaR
- Leptokurtosis
- Marginal VaR
- Mean deviation
- Monte Carlo method
- Risk
- Risk appetite
- Risk measurement
- Standard deviation
- Variance
- Variability
- Volatility