Risk
Value at risk
Also called VaR
An estimate of the most you would expect to lose over a period, at a stated confidence level.
How it works
A one-day 95% VaR of $50,000 means that on 95 days in 100, losses should be under $50,000. It compresses a whole risk profile into one currency figure, which is why institutions and regulators like it.
It says nothing whatsoever about the other five days. That silence is the reason conditional VaR exists.
Where it misleads people
VaR is routinely misread as a worst case. It is the opposite: it is the threshold below which the ordinary days sit, and every genuine disaster lives in the tail it excludes.
Related terms
- Conditional value at riskThe average loss on the bad days that VaR excludes.
- Fat tailsThe tendency of extreme market moves to happen far more often than standard statistics predict.
- Stress testModelling what a portfolio would do under a specific severe scenario, rather than under average conditions.
- Standard deviationA statistical measure of how far values typically sit from their average.
Mentioned in
More in Risk
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.