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Value at risk: a critical overview

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  • Robert Sollis

Abstract

Purpose – A misplaced reliance on value at risk (VaR) has been focused on in the media as one of the main reasons for the current financial crisis, and the recently published Turner Review by the UK Financial Services Authority concurs. The purpose of this paper is to present an introductory overview of VaR and its weaknesses which will be easily understood by non-technical readers. Design/methodology/approach – Simple numerical examples utilising real and simulated data are employed to reinforce the main arguments. Findings – This paper explains that some of the main approaches employed by banks for computing VaR have serious weaknesses. These weaknesses have contributed to the current financial crisis. Research limitations/implications – Consistent with the introductory nature of this paper, the empirical research is limited to simple examples. Practical implications – The evidence here suggest that if VaR is to play a major role under future financial regulation then research is required to develop improved estimation techniques and backtesting procedures. Originality/value – This paper differs from many academic papers on VaR by assuming only a very basic knowledge of mathematics and statistics.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Regulation and Compliance.

Volume (Year): 17 (2009)
Issue (Month): 4 (November)
Pages: 398-414

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Handle: RePEc:eme:jfrcpp:v:17:y:2009:i:4:p:398-414

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Related research

Keywords: Regulation; Risk management; Value analysis;

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Cited by:
  1. Bogdan ZUGRAVU & Dumitru Cristian OANEA & Victoria Gabriela ANGHELACHE, 2013. "Analysis Based on the Risk Metrics Model," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 61(2), pages 145-154, May.
  2. Dumitru Cristian OANEA & Victoria Gabriela ANGHELACHE & Bogdan ZUGRAVU, 2013. "Econometric Model for Risk Forecasting," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 61(2), pages 123-127, May.

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