Abstract
Despite advances in finance and risk management, a satisfactory method for measuring the total financial risk faced by a business or bank at any time remains elusive, says Paul Glasserman. Value-at-Risk (VaR) is one attempt, and it has certainly helped people grapple with basic issues in market risk management. Regulatory concern over the use of derivatives has helped popularise it, as have the opportunities for risk capital savings by banks that develop sophisticated VaR measurement systems. After explaining the fundamental principles behind VaR and the landmarks in its history, the author outlines some of the difficulties in its measurement. Questionable assumptions include a normal market, the linearity of portfolio values and constancy of volatility. VaR's usefulness, he concludes, lies more in the processes and systems it encourages than in the substance of the single number it provides.