Que Es VaR

Whatis VAR?

Value at Risk, or VAR, is a measure of market risk. It expresses the maximum potential loss by an investor on the value of an asset or a portfolio of assets and liabilities, as a function of a ownership timeframe and confidence interval. It is based on a sample of historical data and is deduced from normal statistical laws.

For example, a portfolio worth €100m, with a VAR of -€2.5m at 95% (calculated on a monthly basis) has just a 5% chance to depreciate in value by more than €2.5m in one month.

VAR, which is used intensely by financial establishments as a management tool, is closely correlated to duration.

VAR is beginning to be used by major industrial groups, such as TeleDanmark, which publish it in their annual reports. Itnonetheless has twodrawbacks:

• It is based on the assumption that markets follow normal distribution laws, which understates the frequency of extreme values;

• It tells us nothing about the potential loss that occurs beyond the confidence interval. Taking the previous example, how much can be lost in less than 5% of the cases: €2.6m? €10m? €100m? Not exactly all in the same ball park, are they? VAR tellsusnothinghere.

Whatis VAR?

Value at Risk, or VAR, is a measure of market risk. It expresses the maximum potential loss by an investor on the value of an asset or a portfolio of assets and liabilities, as a function of a ownership timeframe and confidence interval. It is based on a sample of historical data and is deduced from normal statistical laws.

For example, a portfolio worth €100m, with a VAR of -€2.5m at 95% (calculated on a monthly basis) has just a 5% chance to depreciate in value by more than €2.5m in one month.

VAR, which is used intensely by financial establishments as a management tool, is closely correlated to duration.

VAR is beginning to be used by major industrial groups, such as TeleDanmark, which publish it in their annual reports. Itnonetheless has twodrawbacks:

• It is based on the assumption that markets follow normal distribution laws, which understates the frequency of extreme values;

• It tells us nothing about the potential loss that occurs beyond the confidence interval. Taking the previous example, how much can be lost in less than 5% of the cases: €2.6m? €10m? €100m? Not exactly all in the same ball park, are they? VAR tellsusnothinghere.

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