Measurement of the Market Risk- the Value at Risk Method
AbstractThe Value at Risk (VaR) method permits to define, with a certain accepted probability, the maximum loss to which the investor can be exposed within a given time horizon. This measurement opens wide interpretation possibilities and can be used both to quantify all kinds of financial risk and to measure risks other than the market-related ones. It also permits to assess the diversification of the portfolio and the capital adequacy, as well as to adjust the operation effectiveness by the factor of the risk being run at the level of both the whole institution and its individual parts. Prior to the VaR calculation, the user must arbitrarily choose the time horizon for which the risk is to be estimated and the confidence level at which the calculation is to be performed. The choice of these parameters has a strong influence on the obtained result. The confidence level determines the reliability degree of the statistical estimation being made. Along with increase in the calculation probability, there is increase in the value of VaR. The time horizon means the time range for which the VaR is calculated, i.e. the period over which the calculated potential loss on the portfolio can take place. The longer the adopted time horizon, the higher the value at risk is. When using the VaR method, its limitations must be kept in mind. The presented analytical method assumes that the risk is subject to normal distribution. It also assumes that the composition of the portfolio does not undergo any change over the given time horizon. In reality, such conditions often are difficult to meet.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Faculty of Economic Sciences, University of Warsaw in its journal Ekonomia journal.
Volume (Year): 8 (2003)
Issue (Month): ()
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Piotr Kochanski).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.