In the on-going financial crisis, it seems that the value-at-risk (VaR) approach to risk management has failed miserably. For example, Merrill Lynch reported 2007 year-end daily trading VaR of $157 million, including US sub-prime and other residential mortgage products. But the reported VaR had no relationship at all to the bank’s subprime loss in 2007, and which, by January 2008 had reached a stunning $24.5 billion. There has been no shortage of critics of VaR ever since the concept was introduced and the voices against it are getting louder. Click here to read the full story
The concept of VaR arose as a result of searching for an aggregate measure of risk. In 1980s, facing increasing market volatilities, financial firms started setting up risk management groups and tried to find ways to aggregate the firm-wide risk. In 1985, JPMorgan developed the first system of VaR, which measures a portfolio’s maximum potential loss over a horizon with a given confidence level. In the 1990s, VaR became very popular among financial institutions, as well as investors.
The following article is contributed by Yu Zhu, professor of finance, China Europe International Business School and former director, modeling and analytics group, Merrill Lynch
Source: The Asian Banker, 06.05.2009
Filed under: Asia, Banking, China, News, Risk Management , Banking System, Basel II, Basel III, Merrill Lynch, Risk Management
