Date: September 13, 1998
Question: "How Far with VAR (Value at Risk)"
Answer: Value at Risk (VAR) does not go very far when you need proactive risk management. VAR is essentially a historically driven approach which hopes that the markets conform to statistical normalcy despite quantitative evidence to the contrary.
Value at Risk exhibits the following characteristics.
- Good starting point for Risk Quantification
- Standardized Methodology
- Adaptable when properly modified and applied
- Depends on Normalcy - Not Fat Tails
- Assumes Independence of Returns
- Expects Markets to Conform to Model Design
The methodology breaks down when times are turbulent. Can you afford to rely on VAR by itself?
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