Value at Risk

Abstract

This article is a self-contained introduction to the concept and methodology of value at risk (VAR), a recently developed tool for measuring an entity's exposure to market risk. We explain the concept of VAR and then describe in detail the three methods for computing it—historical simulation, the delta-normal method, and Monte Carlo simulation. We also discuss the advantages and disadvantages of the three methods for computing VAR. Finally, we briefly describe stress testing and two alternative measures of market risk.

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