Financial Analysts Journal · 1995 · 363 citations · 0 references
BusinessFinanceRisk ManagementFinancial EconomicsPortfolio ManagementQuantitative FinanceFinancial RiskPortfolio Risk ManagementRisk EvaluationRisk ModelingRisk-based Decision MakingValue At RiskEnd UsersPortfolio Risk MeasurementRisk Portfolio ManagementRisk-return Trade-offs
Value at risk (VAR) is widely adopted for risk management, yet its effectiveness varies greatly depending on parameters, data, assumptions, and methodology. The study shows that VAR calculations differ widely across techniques and portfolios, highlighting the seductive yet dangerous nature of relying on a single approach, and indicating that VAR alone cannot fully control risk.
Value at risk (VAR) has gained rapid acceptance as a valuable approach to risk management. Not all VARs are equal, however. A study of VAR techniques used by dealers and end-users reveals that VAR calculations differ significantly for the same portfolio. VARs are extremely dependent on parameters, data, assumptions, and methodology. Calculation of eight common VARs for three hypothetical portfolios demonstrates the potentially seductive but dangerous nature of any single approach to risk management. In sum, although VAR and other quantitative techniques are necessary aspects of an effective risk-management program, they are not sufficient to control risk.