Construct · 1 fields · 4 citations

value at risk: a standalone construct

One name. One construct. A landmark on the map.

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valueat risk1 CONSTRUCTValue at riskJ.P. MORGAN · LOSS LIMIT

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Finance

The loss a portfolio is not expected to exceed at a set confidence over a horizon

J.P. Morgan's 1994 RiskMetrics technical document introduced value at risk as a single summary number for market risk, building on the mean-variance portfolio theory that Harry Markowitz set out in 1952. Value at risk states the largest loss a portfolio is not expected to exceed over a fixed time horizon at a chosen confidence level: a one-day 95% value at risk of $1 million means that on about 95 of 100 days the loss should stay below $1 million. Philippe Jorion's 1997 book gave the measure its standard textbook treatment, and Darrell Duffie and Jun Pan's 1997 overview surveyed the main ways it is computed. What makes value at risk a landmark is that it compresses the whole distribution of possible gains and losses into one figure tied to a probability and a horizon, which lets banks, regulators, and fund managers describe market risk in a common, comparable unit.[1][2][3][4]

Unit
A monetary loss threshold, stated for a given confidence level and time horizon (for example a one-day 99% value at risk in currency units)
Recovery means
Not applicable
Measured by
Estimated from the portfolio's return distribution by historical simulation, the variance-covariance (parametric) method, or Monte Carlo simulation, and checked after the fact by backtesting the count of losses that exceeded the threshold against the chosen confidence level

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Nearby constructs

portfolio3 fields · 3 citationsjingle · one word, three constructsrisk6 fields · 13 citationsjingle · one name, six constructsexposure6 fields · 13 citationsjingle · one name, six constructs

References

  1. J.P. Morgan. (1994). RiskMetrics: Technical document (1st ed.). J.P. Morgan.
  2. Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x
  3. Jorion, P. (1997). Value at risk: The new benchmark for controlling market risk. Irwin.
  4. Duffie, D., & Pan, J. (1997). An overview of value at risk. The Journal of Derivatives, 4(3), 7–49. https://doi.org/10.3905/jod.1997.407971

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