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.

Value at risk is sometimes abbreviated as 'VAR', rather than 'VaR'.

It is sometimes written as 'Value at Risk'.

See also

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