• Dependence and Risk Management

    What's VaR?

    The Value-at-Risk (VaR) of a portfolio is one of the most fundamental risk measures applied in the financial industry. Although sometimes being heavily criticized by theorists, in practice the VaR is an important number for many investors, both due to regulatory investment restrictions as well as for making investment decisions. The present article aims at presenting in simple terms how the VaR is computed in practice, and at collecting and discussing some of the critical aspects. Special attention is put on data availability, long holding periods, and implicit distributional assumptions underlying the common “square root of t”-rule.