Value at Risk (VaR)

VaR is the maximum potential loss that a portfolio can suffer in the 1% worst cases in N-days. -> wrong! VaR is the minimum potential loss that a portfolio can suffer in the 1% worst cases in N-days. -> Embarassing! VaR is the maximum potential loss that a portfolio can suffer in the 99% best cases in N-days. -> compromise! VaR is defined for a given confidence level time horizon.Modeling VaR would involve estimating ‘extreme percentiles’ - statistical distributions characterizing ‘returns’. time aggregation - square-root-of-time rule.