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value-at-risk


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(VAR)

A measure of risk developed at the former US Bank J. P. Morgan Chase in the 1990s, now most frequently applied to measuring market risk and credit risk. It is the level of losses over a particular period that will only be exceeded in a small percentage of cases. A cut-off value for portfolio gains and losses is established that excludes a certain proportion of worst-case results (e.g. the bottom 1% of outcomes); the value-at-risk is then measured relative to that cut-off value. VAR was initially designed to measure the overnight risk in certain highly diversified portfolios. It has since developed into a finance industry standard and has been incorporated into the regulatory requirements applying to financial institutions (notably the Basle Market Risk Amendment issued by the Bank for International Settlements in 1996). The data used for the value at-risk calculation can be derived from the variance-covariance matrix of the portfolio, the historical performance of the financial obligations in the portfolio, or by Monte Carlo simulation. See also expected tail losses: relative value-at-risk.

Subjects: Financial Institutions and Services.


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