FRM Glossary · Part I+II · Market Risk

Value at Risk (VaR)

The loss threshold such that there is only a small probability (e.g. 1%) of the portfolio losing more than this amount over a given horizon.

In more detail

Value at Risk (VaR) summarises portfolio downside into a single number: with confidence level X (commonly 95% or 99%), VaR is the loss that is not expected to be exceeded over horizon H. VaR can be computed parametrically (variance–covariance), historically (empirical quantile), or via Monte Carlo simulation. VaR is non-coherent — it is not sub-additive — which is why Expected Shortfall is increasingly preferred for tail-risk measurement under Basel frameworks.