42 Frequently Asked Questions In Quantitative Finance
Table 2.1:Degree of confidence and the
relationship with deviation from the mean.
Degree of Number of standard
confidence deviations from
the mean
99% 2.326342
98% 2.053748
97% 1.88079
96% 1.750686
95% 1.644853
90% 1.281551
- You can adjust the time horizon depending on your
trading style. If you hedge every day you may want a
one-day horizon, if you buy and hold for many
months, then a longer horizon would be relevant
- It can be broken down into components, so you can
examine different classes of risk, or you can look at
the marginal risk of adding new positions to
your book
- It can be used to constrain positions of individual
traders or entire hedge funds
- It is easily understood, by management, by investors,
by people who are perhaps not that technically
sophisticated
Of course, there are also valid criticisms as well.
- It does not tell you what the loss will be beyond the
VaR value
- VaR is concerned with typical market conditions, not
the extreme events
- It uses historical data, ‘‘like driving a car by looking
in the rear-view mirror only’’
