Risk Measurements: Value-at-Risk (VaR)

One of the most popular risk metrics of the past decades is undoubtedly the Value at Risk (VaR) metric.

This article will provide an introduction to this risk measure.

Photo by Loic Leray on Unsplash

History

At the beginning of the '90s, Dennis Weatherstone became the CEO of the bank J.P.Morgan and made a habit of reading the company’s total risk which he wanted to be delivered every morning on his desk.

The image has been taken from https://www.independent.co.uk/

This pressure that the CEO had put his employees under, influenced the company to standardize various risk metrics. The company had put together all these metrics under a separate company called RiskMetrics because more and more companies required this service.

This newly created company started publishing a yearly report with all their findings and in 1994 their report contained a risk model called “Value at Risk”.

Eventually, in 2008, RiskMetrics would be acquired by MSCI against $1'550'000'000.

Value-at-Risk (VaR)

Value at Risk (VaR) is a statistical technique used to measure the risk of loss of an asset or a portfolio of financial assets. It…