Value at risk

(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

• Cash flow at risk
• Correlated value at risk
• Delta-normal method
• Earnings at risk
• Frequency distribution
• Historical simulation method
• Incremental VaR
• Leptokurtosis
• Marginal VaR
• Monte Carlo method
• Risk appetite
• Standard deviation
• Variance