Value-at-risk is a very important financial metric that measures the risk associated with a position, portfolio, and so on. It is commonly abbreviated to VaR, not to be confused with Vector Autoregression. VaR reports the worst expected loss – at a given level of confidence – over a certain horizon under normal market conditions. The easiest way to understand it is by looking at an example. Let's say that the 1-day 95% VaR of our portfolio is $100. This means that 95% of the time (under normal market conditions), we will not lose more than $100 by holding our portfolio over one day.
It is common to present the loss given by VaR as a positive (absolute) value. That is why in this example, a VaR of $100 means losing no more than $100.
There are several ways to calculate VaR, some of which are:
- Parametric Approach (Variance...
