Market risk is the potential loss on investment due to fluctuations in the market value of traded position that cannot be hedged or diversified away. Value at Risk (VAR) is a standard measure of market risk, adopted by all financial market participants. Its use in risk management is a legal and regulatory requirement. VAR is a single number that defines risk as mark-to-market loss on a fixed portfolio over a fixed time horizon, assuming normal markets. This paper presents and compares several VAR methodologies: parametric, historical, historical simulation and stochastic (Monte Carlo) simulation. It can be shown that, despite excessive computational requirements and reliance on sophisticated mathematical models; Monte Carlo simulation is a superior to alternative VAR measurement methods, due to its flexibility and adaptability.
Natasha Kozul. "Value At Risk (Var) As A Market Risk Measure." Montenegrin Journal of Economics. vol. 6, no. 11, 2010, p. 145-148
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