VaR
Value at Risk
Short definition
Value at risk is a loss threshold at a chosen horizon and confidence: “worse losses are rare under the assumed distribution.” It is a limit tool; it does not size the tail disaster.
Detailed explanation
It is computed parametrically, historically or by Monte Carlo. The assumptions are the distribution, correlations and window. In a crisis volatility jumps and correlations go to one; yesterday’s VaR describes yesterday’s market.
A one-day VaR can be shorter than the firm’s true unwind horizon. Expected shortfall adds the tail mean; VaR alone is not enough.
Why it matters for the CFO
Treasury limits are often set in VaR; if management hears “maximum loss”, the day outside the model is a surprise.
How it is calculated
VaR_α ≈ kayıp dağılımının α kuyruk eşiği (ör. %95, 1 gün)
The threshold is a quantile of the loss distribution. The distribution and horizon belong to the model; there is no universal formula.
Variables in the formula
- α: confidence level (e.g. 95% / 99%)
How to read it
A 95% one-day VaR of 2 mn TL says that on about one day in twenty the loss can exceed 2 mn; it does not say whether the exceedance is 3 or 30.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.