Value At Risk (Var) As A Market Risk Measure

Natasha Kozul

Montenegrin Journal of Economics, 2010, vol. 6, issue 11, 145-148

Abstract: Market risk is the potential loss on investment due to fluctuations in the market value of traded position that cannot be hedged or diversified away. Value at Risk (VAR) is a standard measure of market risk, adopted by all financial market participants. Its use in risk management is a legal and regulatory requirement. VAR is a single number that defines risk as mark-to-market loss on a fixed portfolio over a fixed time horizon, assuming normal markets. This paper presents and compares several VAR methodologies: parametric, historical, historical simulation and stochastic (Monte Carlo) simulation. It can be shown that, despite excessive computational requirements and reliance on sophisticated mathematical models; Monte Carlo simulation is a superior to alternative VAR measurement methods, due to its flexibility and adaptability.

Date: 2010
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