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Value At Risk (Var) As A Market Risk Measure

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  • Natasha Kozul

Abstract

Market risk is the potential loss on investment due to fluctuations in the market value of traded position that cannot be hedged or diversified away. Value at Risk (VAR) is a standard measure of market risk, adopted by all financial market participants. Its use in risk management is a legal and regulatory requirement. VAR is a single number that defines risk as mark-to-market loss on a fixed portfolio over a fixed time horizon, assuming normal markets. This paper presents and compares several VAR methodologies: parametric, historical, historical simulation and stochastic (Monte Carlo) simulation. It can be shown that, despite excessive computational requirements and reliance on sophisticated mathematical models; Monte Carlo simulation is a superior to alternative VAR measurement methods, due to its flexibility and adaptability.

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  • Natasha Kozul, 2010. "Value At Risk (Var) As A Market Risk Measure," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 6(11), pages 145-148.
    • Handle: RePEc:mje:mjejnl:v:6:y:2010:i:11:p:145-148
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    References listed on IDEAS

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    1. Engle, Robert F. & Manganelli, Simone, 2001. "Value at risk models in finance," Working Paper Series 75, European Central Bank.
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