VaR (Value at Risk)
Quantifying the worst-case loss you can reasonably expect
Definition
Value at Risk (VaR) is a statistical measure of the maximum potential loss of a portfolio over a given time period at a specified confidence level. For example, a 1-day 95% VaR of $50,000 means there is a 5% probability of losing more than $50,000 in a single trading day. VaR is widely used by risk managers and financial institutions to quantify and set limits on potential losses. It is a key metric in Basel capital requirements for banks.
Example
A hedge fund's equity portfolio has a 1-day 99% VaR of $2 million. This means on any given day, there is only a 1% chance of losing more than $2 million. During normal markets, this holds true. However, during the 2008 financial crisis, many institutions exceeded their VaR limits repeatedly — demonstrating that VaR models fail during fat-tail events (black swans).
Related Terms
Frequently Asked Question
What is Value at Risk (VaR)?
VaR quantifies the maximum expected loss at a given confidence level over a time period. A 99% 1-day VaR of $1M means only a 1% chance of losing more than $1M in a day. Banks use VaR to set capital requirements.
APA Citation
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· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.