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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 publishedTurner Reviewby 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.

Suggested Citation

  • Robert Sollis, 2009. "Value at risk: a critical overview," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 17(4), pages 398-414, November.
    • Handle: RePEc:eme:jfrcpp:v:17:y:2009:i:4:p:398-414
    DOI: 10.1108/13581980911004370
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    Citations

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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. Constantin Anghelache & Bodo Gyorgy, 2016. "Theoretical aspects regarding systemic risk and managerial decisions during the crisis," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(12), pages 110-116, December.
    3. Dumitru-Cristian OANEA & Gabriela-Victoria ANGHELACHE, 2014. "Systemic Risk Caused By Romanian Financial Intermediaries During Financial Crisis: A Covar Approach," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 14, pages 171-178, December.
    4. Constantin ANGHELACHE & Madalina-Gabriela ANGHEL & Gyorgy BODO, 2017. "Theoretical Aspects Of The Role Of Information In The Process Of Decisions/Risks Modeling," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 65(6), pages 102-111, June.
    5. 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.
    6. Gabriela Anghelache & Dumitru-Cristian Oanea, 2014. "Main Romanian Commercial Banks’ Systemic Risk during Financial Crisis: a CoVar Approach," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 6(2), pages 069-080, December.

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