What is 'Value At Risk  VaR'
Value at risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their institutional portfolios. VaR calculations can be applied to specific positions or portfolios as a whole or to measure firmwide risk exposure.
BREAKING DOWN 'Value At Risk  VaR'
VaR modeling determines the potential for loss in the entity being assessed, as well as the probability of occurrence for the defined loss. VaR is measured by assessing the amount of potential loss, the probability of occurrence for the amount of loss and the time frame. For example, a financial firm may determine an asset has a 3% onemonth VaR of 2%, representing a 3% chance of the asset declining in value by 2% during the onemonth time frame. The conversion of the 3% chance of occurrence to a daily ratio places the odds of a 2% loss at one day per month.Applying VaR
Investment banks commonly apply VaR modeling to firmwide risk due to the potential for independent trading desks to expose the firm to highly correlated assets unintentionally. Employing a firmwide VaR assessment allows for the determination of the cumulative risks from aggregated positions held by different trading desks and departments within the institution. Using the data provided by VaR modeling, financial institutions can determine whether they have sufficient capital reserves in place to cover losses or whether higherthanacceptable risks require concentrated holdings to be reduced.
Problems With VaR Calculations
There is no standard protocol for the statistics used to determine asset, portfolio or firmwide risk. For example, statistics pulled arbitrarily from a period of low volatility may understate the potential for risk events to occur, as well as the potential magnitude. Risk may be further understated using normal distribution probabilities, which generally do not account for extreme or black swan events.
The assessment of potential loss represents the lowest amount of risk in a range of outcomes. For example, a VaR determination of 95% with 20% asset risk represents an expectation of losing at least 20% one of every 20 days on average. In this calculation, a loss of 50% still validates the risk assessment.
These problems were exposed in the financial crisis of 2008, as relatively benign VaR calculations understated the potential occurrence of risk events posed by portfolios of subprime mortgages. Risk magnitude was also underestimated, which resulted in extreme leverage ratios within subprime portfolios. As a result, the underestimations of occurrence and risk magnitude left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed.

Marginal VaR
The additional amount of risk that a new investment position ... 
Incremental Value At Risk
The amount of uncertainty added to or subtracted from a portfolio ... 
Conditional Value At Risk  CVaR
A risk assessment technique often used to reduce the probability ... 
Probability Distribution
A statistical function that describes all the possible values ... 
Risk Assessment
The process of determining the likelihood that a specified negative ... 
Economic Capital
The amount of capital that a firm, usually in financial services, ...

Investing
Value at Risk (VaR)
Value at risk, often referred to as VaR, measures the amount of potential loss that could happen in an investment or a portfolio of investments over a given time period. 
Personal Finance
Backtesting ValueatRisk (VaR): The Basics
Learn how to test your VaR model for accuracy. 
Investing
An Introduction To Value at Risk (VAR)
Volatility is not the only way to measure risk. Learn about the "new science of risk management". 
Trading
How To Convert Value At Risk To Different Time Periods
Volatility is not the only way to measure risk. Learn about the "new science of risk management". 
Investing
How Investment Risk Is Quantified
FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk. 
Financial Advisor
Measuring And Managing Investment Risk
Risk is inseparable from return. Learn more about these measures and how to balance them. 
Managing Wealth
JP Morgan: The Other Side Of The Hedge
A hedge is supposed to decrease overall risk, but when it's instead used to increase profits, the risk can be multiplied. 
Investing
Understanding Liquidity Risk
Make sure that your trades are safe by learning how to measure the liquidity risk. 
Investing
Low Vs. HighRisk Investments For Beginners
Understanding risk is key to better investing. 
Managing Wealth
Why Companies Need Risk Management
Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?

What does Value at Risk (VaR) have to do with maximization of shareholder wealth?
Learn about the value at risk statistical measure and how examining the VaR for their investments can help investors maximize ... Read Answer >> 
What does Value at Risk (VaR) say about the "tail" of the loss distribution?
Learn about value at risk and conditional value at risk and how both models interpret the tail ends of an investment portfolio's ... Read Answer >> 
What do regulators think of Value at Risk (VaR)?
Read about the history of value at risk metrics, and learn how regulatory agencies played a role in their promotion and how ... Read Answer >> 
What is a "linear" exposure in Value at Risk (VaR) calculation?
Learn how the valueatrisk (VaR) calculation is used for portfolios with linear risk as opposed to nonlinear risk, and understand ... Read Answer >> 
What are some common measures of risk used in risk management?
Learn about common risk measures used in risk management and how to use common risk management techniques to assess the risk ... Read Answer >> 
What's the difference between a confidence level and a confidence interval in Value ...
Learn about the value at risk, how confidence intervals and confidence levels are used to interpret the value at risk and ... Read Answer >>