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Value at risk: a new methodology for measuring portfolio risk

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  • Gregory P. Hopper

Abstract

Many different types of institutions hold portfolios of assets, and prudent financial management dictates that these firms be alert to any risks these assets may carry. How can these institutions judge the likelihood and magnitude of potential losses on their portfolios? A new methodology called value at risk (VAR) can be used to estimate these losses. In this article, Greg Hopper describes the various methods used to calculate VAR, paying special attention to its weaknesses.

Suggested Citation

  • Gregory P. Hopper, 1996. "Value at risk: a new methodology for measuring portfolio risk," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 19-31.
  • Handle: RePEc:fip:fedpbr:y:1996:i:jul:p:19-31
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/1996/july-august/value-at-risk.cfm
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    2. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
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    Cited by:

    1. Cabedo Semper, J. David & Moya Clemente, Ismael, 2003. "Value at risk calculation through ARCH factor methodology: Proposal and comparative analysis," European Journal of Operational Research, Elsevier, vol. 150(3), pages 516-528, November.
    2. David Cabedo, J. & Moya, Ismael, 2003. "Estimating oil price 'Value at Risk' using the historical simulation approach," Energy Economics, Elsevier, vol. 25(3), pages 239-253, May.
    3. Mark R. Manfredo. & Raymond M. Leuthold, 1999. "Market Risk Measurement and the Cattle Feeding Margin: An Application of Value-at-Risk," Finance 9908002, EconWPA.
    4. Gregory P. Hopper, 1997. "What determines the exchange rate: economic factors or market sentiment?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 17-29.
    5. Cornelis A Los, 2005. "Why VaR FailsLong Memory and Extreme Events in Financial Markets," The IUP Journal of Financial Economics, IUP Publications, vol. 0(3), pages 19-36, September.
    6. George S. Oldfield & Anthony M. Santomero, 1997. "The Place of Risk Management in Financial Institutions," Center for Financial Institutions Working Papers 95-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. Mark R. Manfredo & Raymond M. Leuthold, 1998. "Agricultural Applications of Value-at-Risk Analysis: A Perspective," Finance 9805002, EconWPA.

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    Keywords

    Bank capital ; Bank investments ; Risk;

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