UK Accounting Glossary
Value At Risk (VAR) is a mechanism for measuring market risk and credit risk.
Value At Risk (VAR) is a measure of risk developed at the former US bank J.P. Morgan Chase during the 1990’s.
This measure of risk is most frequently applied to measuring both market risk and credit risk.
It is the level of losses over a particular period that will only be exceeded in a minuscule percentage of cases.
A cut-off value for gains and losses is established that excludes a certain proportion of worst-case results (e.g. the bottom 1% of possible outcomes); the value-at-risk is then measured relative to that cut-off value.
VAR was initially designed to measure the overnight risk in certain highly diversified portfolios.
It has since been developed into an industry standard (within the Finance sector) and has been incorporated into the regulatory requirements applicable to financial institutions.
In the wake of the 2007-2008 financial crisis, there have been claims that VAR methodology played a detrimental contributory cause in the crisis, by fostering false confidence in the market and by promoting excessive risk-taking.
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This glossary post was last updated: 5th May 2019.