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Value at risk: new approaches to risk management

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  • Katerina Simons
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    Abstract

    Managing risk has always been an integral part of banking. In the past two years an approach to risk management called "Value at Risk" has been accepted by both practitioners and regulators as the "right" way to measure risk, becoming a de facto industry standard. Yet, the danger is that overreliance on value at risk can give risk managers a false sense of security or lull them into complacency. Value at risk is only one of many tools of managing risk, and it is based on a number of unrealistic assumptions. There is no generally accepted way to calculate it, and various methods can yield widely different results.> This article described several common methods for calculating value at risk and highlights important assumptions and methodological issues. The author discusses the strengths and weaknesses of value at risk, pointing out that its use has created a common language for discussions about risk and prompted more dialogue about risk issues. She cautions, however, that successful risk management is a much broader task, which depends crucially on appropriate incentives and internal controls.

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    File URL: http://www.bostonfed.org/economic/neer/neer1996/neer596a.htm
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    File URL: http://www.bostonfed.org/economic/neer/neer1996/neer596a.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1996)
    Issue (Month): Sep ()
    Pages: 3-13

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    Handle: RePEc:fip:fedbne:y:1996:i:sep:p:3-13

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    Related research

    Keywords: Risk;

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    Cited by:
    1. Özler, Aysun & Tan, BarIs & Karaesmen, Fikri, 2009. "Multi-product newsvendor problem with value-at-risk considerations," International Journal of Production Economics, Elsevier, vol. 117(2), pages 244-255, February.
    2. Ralph C. Kimball, 1997. "Innovations in performance measurement in banking," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 23-38.
    3. Sean D. Campbell, 2005. "A review of backtesting and backtesting procedures," Finance and Economics Discussion Series 2005-21, Board of Governors of the Federal Reserve System (U.S.).

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