Article1995

VAR: Seductive but Dangerous

362 citations0/0 files storedFinancial Analysts Journal

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Financial Risk and Volatility Modeling Risk Management in Financial Firms Risk and Portfolio Optimization

Abstract

Value at risk (VAR) has gained rapid acceptance as a valuable approach to risk management. Not all VARs are equal, however. A study of VAR techniques used by dealers and end-users reveals that VAR calculations differ significantly for the same portfolio. VARs are extremely dependent on parameters, data, assumptions, and methodology. Calculation of eight common VARs for three hypothetical portfolios demonstrates the potentially seductive but dangerous nature of any single approach to risk management. In sum, although VAR and other quantitative techniques are necessary aspects of an effective risk-management program, they are not sufficient to control risk.

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1996Risk 2 : Measuring the Risk in Value at Risk 2005The hidden dangers of historical simulation 1997Evaluating Value at Risk Methodologies: Accuracy versus Computational Time 2006Evaluating predictive performance of value-at-risk models in emerging markets: a reality check 2001Testing and comparing Value-at-Risk measures 2014Islamic equity market integration and volatility spillover between emerging and US stock markets 2003Selection of Value‐at‐Risk models 2013A comprehensive review of Value at Risk methodologies

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