A review and update of Value at Risk

Abstract

Large bank losses in the mid-1980s resulted in financial risk management - as a distinct professional activity - becoming increasingly important. Several statistical techniques have since evolved to measure and manage market risk, of which Value at Risk (VaR) remains highly popular. Even the recently (2013) proposed expected shortfall metric by the Basel Committee still requires VaR as benchmark. No universally-accepted method exists for VaR's calculation, but the technique remains widely used. This article reviews several computational variations of VaR, as well as assessing some assumptions employed by each model. Finally, each variations performance is measured at various confidence levels using equity portfolios in two different financial milieus and periods of market volatility.