Value at risk: Difference between revisions
imported>Doug Williamson m (Category added 9/10/13) |
imported>Doug Williamson (Clarify wording and add 'VAR' as alternative capitalisation of abbreviation.) |
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(VaR). | (VaR). | ||
Value at risk | 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 €. | ||
For 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. | For 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. | ||
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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. | ||
Value at risk is sometimes abbreviated as 'VAR', rather than 'VaR'. | |||
Revision as of 07:51, 14 September 2014
(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 €.
For 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.
Value at risk is sometimes abbreviated as 'VAR', rather than 'VaR'.
