Measurement of the Market Risk- the Value at Risk Method
The 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.
Volume (Year): 8 (2002)
Issue (Month): ()
|Contact details of provider:|| Postal: ul. Dluga 44/50, 00-241 Warszawa|
Phone: +48 +22 5549184
Fax: (+48 22) 831 28 46
Web page: http://www.wne.uw.edu.pl
More information through EDIRC
|Order Information:|| Web: http://ekonomia.wne.uw.edu.pl Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- anonymous, 1996. "Atlanta Fed's risk management activities reorganized," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 1-4.
- anonymous, 1996. "Risk-management plans must make the grade," Financial Update, Federal Reserve Bank of Atlanta, issue Apr, pages 1-2.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eko:ekoeko:8_118. See general 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: (Marta Höffner)
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.