Value-at-Risk and Market Crashes

Philip Hua and Paul Wilmott

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: If the Black-Scholes model and its extensions were the discoveries of the 70s and 80s, then Value-at-risk (VaR) models are the darlings of the 90s. These models have many uses within an organisation; for example, a risk manager may use VaR to allocate trading limits, senior management for asset allocation and regulators set and review capital reserves for the institutions. Whatever the uses, the essence of a VaR number is to act a benchmark for measuring how "risky" the portfolio is across different business lines and products. This article discusses the pitfalls of traditional VaR during times of volatile market and makes some suggestions for improvements.

Date: 1999
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