Value-at-risk model

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Value-at-risk model (VaR)

Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Value at Risk

In risk analysis, a method to measure the probability of loss on an investment. One calculates the value at risk by measuring the historical trends and volatility of the investment. The method is used most often by investors in highly volatile commodities, such as energy products.
References in periodicals archive ?
These results stand somewhat in contrast to the findings in Jorion (2002), who concludes that value-at-risk models are good predictors of future trading revenue variability.
See Hendricks and Hirtle (1997) for a discussion of the rationale behind the use of value-at-risk models for regulatory capital requirements and the choice of supervisory parameters specified in the capital standards.
This means that the profit and loss figures used in the backtest could reflect influences not incorporated into the value-at-risk model, potentially introducing bias into the backtest results.
Thus, the supervisory backtest is calibrated to a one-day standard to strike a balance between the need to have a sufficient amount of data to give the backtest statistical power and the desire to determine the accuracy of the value-at-risk model used in the capital calculations.
12) Under the most recent announcement by the Basle Committee on Banking Supervision (1997), these model-based specific risk estimates are subject to a scaling factor of four until market practice evolves and banks can demonstrate that their models of specific risk adequately address both idiosyncratic risks and "event risks" that might not be captured in a value-at-risk model.
Backtesting is a process of confirming the accuracy of value-at-risk models by comparing value-at-risk estimates with subsequent trading outcomes.
Value-at-risk models aggregate the several components of price risk into a single quantitative measure of the potential for losses over a specified time horizon.
securities firms, has also advocated the use of value-at-risk models as an important way to measure market risk.
Clearly, the use of value-at-risk models is increasing, but how, well do they perform in practice?
Although this article considers value-at-risk models only in the context of market risk, the methodology is fairly general and could in theory address any source of risk that leads to a decline in market values.
27) Financial institutions have made considerable progress over the past two or three years in credit risk modeling, but it is fair to say that these models are at an earlier stage of development than the value-at-risk models used for market risk assessment.
These factors have tended to be incorporated into value-at-risk models after the initial phases of model development.