What is 'Value At Risk  VaR'
Value at risk (VaR) is a statistic that measures and quantifies the level of financial risk within a firm, portfolio or position over a specific time frame. It 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 is used by risk managers in order to measure and control the level of risk exposure. 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'
Value at risk (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 Value at Risk  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
Marginal VaR includes the change in portfolio VaR resulting from ... 
Probability Distribution
A probability distribution is a statistical function that describes ... 
Downside Risk
Downside risk is an estimate of a security's potential to suffer ... 
Economic Capital
Economic capital is the amount of capital that a firm, usually ... 
Barra Risk Factor Analysis
The Barra Risk Factor Analysis is a multifactor model, created ... 
Accepting Risk
Accepting risk occurs when a business acknowledges that the potential ...

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. 
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. 
Investing
Understanding Liquidity Risk
Make sure that your trades are safe by learning how to measure the liquidity risk. 
Managing Wealth
Why Companies Need Risk Management
Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff? 
Financial Advisor
The Importance of a Client's Risk Assessment
Financial advisors and money managers must do a detailed risk assessment regarding each client before they can recommend a course of action. 
Financial Advisor
Active Risk vs. Residual Risk: Differences and Examples
Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences. 
Investing
Scenario Analysis Provides Glimpse Of Portfolio Potential
This statistical method estimates how far a stock might fall in a worstcase scenario. 
Investing
The Risks Associated with Common Investments
Investing inherently involves some risk. Here are some of the different types of investment risks.

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 >> 
How to calculate Value at Risk (VaR) in Excel
Learn what value at risk is, what it indicates about a portfolio and how to calculate the value at risk of a portfolio using ... 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 >> 
What is stress testing in Value at Risk (VaR)?
Discover the difference between Value at Risk, or VaR, and stress testing, and learn how the two concepts might be used together ... Read Answer >> 
What is RiskMetrics in Value at Risk (VaR)?
Learn about RiskMetrics and the value at risk (VaR) and how to calculate the VaR of an investment portfolio using some RiskMetrics ... Read Answer >> 
What is backtesting in Value at Risk (VaR)?
Learn about the value at risk of a portfolio and how backtesting is used to measure the accuracy of value at risk calculations. Read Answer >>