Value at Risk

From WilmottWiki

Value at Risk (VaR) is a measure of the possible downside from an investment or portfolio. A common definition is that Value at Risk is an estimate, with a given degree of confidence, of how much one can lose from one's portfolio over a given time horizon. The degree of confidence is typically set at 95%, 97.5%, 99%, etc. The time horizon of interest may be one day, say, for trading activities or months for a pension fund.

VaR is intended to be a single number used to give a quick overview of risk. It has often been criticised for being too simplistic. Many VaR measures can be criticised for failing to have the properties of coherence. It has been suggested that part of the problems of the hedge fund Long Term Capital Management were due to naive use of VaR measures.

References

Jorion, P 1997 Value at Risk. Irwin