Value-at-risk (VaR)
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The loss threshold exceeded only with a specified probability over a specified horizon (e.g., 'we are 99% confident the daily loss will not exceed $X'). A threshold measure that ignores the severity of losses beyond the threshold; for tail-shape sensitivity use Expected Shortfall (POF_GL_099).
Value-at-risk (VaR) in plain English
Value-at-risk answers a nervous investor's question: "On a bad day, how much could I lose?" It draws a line, for example: "We're 99% sure we won't lose more than $1 million tomorrow." That means on 99 days out of 100 the loss stays under $1 million, but on the 1 unlucky day it can be worse, and VaR deliberately says nothing about HOW much worse. It's like knowing the water will rise past the flood line only 1% of the time, without knowing whether that flood is ankle-deep or a tidal wave, which is exactly why analysts pair it with Expected Shortfall to study those extreme days.
Also called: VaR
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