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VaR
(Value at Risk)
VaR (Value at Risk) quantifies the maximum potential loss over a set time period at a given confidence level (e.g., "1-day 95% VaR of $1M" means 95% chance losses won't exceed $1M daily).
Banks use VaR to measure trading desk risk, typically with 1-day 99% confidence. JPMorgan's 2022 average VaR was $67M. Limitations emerged during the 2008 crisis when "25-sigma" events occurred repeatedly. VaR ignores tail risk beyond the confidence level - Conditional VaR (CVaR) addresses this. Portfolio VaR considers diversification effects. Regulators mandate VaR disclosures, but many firms supplement with stress testing and scenario analysis.
Banks use VaR to measure trading desk risk, typically with 1-day 99% confidence. JPMorgan's 2022 average VaR was $67M. Limitations emerged during the 2008 crisis when "25-sigma" events occurred repeatedly. VaR ignores tail risk beyond the confidence level - Conditional VaR (CVaR) addresses this. Portfolio VaR considers diversification effects. Regulators mandate VaR disclosures, but many firms supplement with stress testing and scenario analysis.