Value at risk (VaR): definition, parameters and benefits.

Abstract

Nowadays, Value at Risk (VaR) is commonly accepted as an essential tool in measuring and controlling market risk. In practice, VaR figures requires the previous definition of certain parameters, such as the level confidence, the holding period, the currency of reference and the methodology of estimation in order to ensure a clear interpretation by its potential users (regulators, traders, shareholders, etc.). In this paper, we focus on the VaR concept, analyzing all those specifications and pointing out its benefits on managing market risk.