Value at risk

Uncommon card · No. 198064

Value at risk (VaR) is a measure of the risk of loss of investment/capital. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses. VaR has four main uses in finance: risk management, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well. However, it is a controversial risk management tool. Important related ideas are economic capital, backtesting, stress testing, expected shortfall, and tail conditional expectation.

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