Editing Value at risk (section)

== Details ==

Common parameters for VaR are 1% and 5% probabilities and one day and two week horizons, although other combinations are in use.<ref name="Pearson">{{cite book|first=Neil|last=Pearson|title=Risk Budgeting: Portfolio Problem Solving with Value-at-Risk|publisher=John Wiley & Sons|year=2002|isbn=978-0-471-40556-6}}</ref>

The reason for assuming normal markets and no trading, and to restricting loss to things measured in [[financial statements|daily accounts]], is to make the loss [[Observability|observable]]. In some extreme financial events it can be impossible to determine losses, either because market prices are unavailable or because the loss-bearing institution breaks up. Some longer-term consequences of disasters, such as lawsuits, loss of market confidence and employee morale and impairment of brand names can take a long time to play out, and may be hard to allocate among specific prior decisions. VaR marks the boundary between normal days and extreme events. Institutions can lose far more than the VaR amount; all that can be said is that they will not do so very often.<ref name="Unbearable" />

The probability level is about equally often specified as one minus the probability of a VaR break, so that the VaR in the example above would be called a one-day 95% VaR instead of one-day 5% VaR. This generally does not lead to confusion because the probability of VaR breaks is almost always small, certainly less than 50%.<ref name="Jorion" />

Although it virtually always represents a loss, VaR is conventionally reported as a positive number. A negative VaR would imply the portfolio has a high probability of making a profit, for example a one-day 5% VaR of negative {{US$|long=no|1 million}} implies the portfolio has a 95% chance of making more than {{US$|long=no|1 million}} over the next day.<ref name="Crouhy">{{cite book|first1=Michel|last1=Crouhy|first2=Dan|last2=Galai|first3=Robert|last3=Mark|title=The Essentials of Risk Management|publisher=McGraw-Hill|year=2001|isbn=978-0-07-142966-5}}</ref>

Another inconsistency is that VaR is sometimes taken to refer to profit-and-loss at the end of the period, and sometimes as the maximum loss at any point during the period. The original definition was the latter, but in the early 1990s when VaR was aggregated across trading desks and time zones, end-of-day valuation was the only reliable number so the former became the ''[[de facto]]'' definition. As people began using multiday VaRs in the second half of the 1990s, they almost always estimated the distribution at the end of the period only. It is also easier theoretically to deal with a point-in-time estimate versus a maximum over an interval. Therefore, the end-of-period definition is the most common both in theory and practice today.<ref name="Lopez">{{cite journal|author=Jose A. Lopez|title=Regulatory Evaluation of Value-at-Risk Models|publisher=Wharton Financial Institutions Center |pages=96–51|date=September 1996|journal=Working Papers}}</ref>