Editing Value at risk (section)

== Risk measure and risk metric ==

The term "VaR" is used both for a [[risk measure]] and a [[risk metric]]. This sometimes leads to confusion. Sources earlier than 1995 usually emphasize the risk measure, later sources are more likely to emphasize the metric.

The VaR risk measure defines risk as [[Mark to market accounting|mark-to-market]] loss on a fixed portfolio over a fixed time horizon. There are many alternative risk measures in finance. Given the inability to use mark-to-market (which uses market prices to define loss) for future performance, loss is often defined (as a substitute) as change in [[Intrinsic value (finance)|fundamental value]]. For example, if an institution holds a [[loan]] that declines in market price because [[interest]] rates go up, but has no change in cash flows or credit quality, some systems do not recognize a loss. Also some try to incorporate the [[Economics|economic]] cost of harm not measured in daily [[financial statements]], such as loss of market confidence or employee morale, impairment of brand names or lawsuits.<ref name="Dowd" />

Rather than assuming a static portfolio over a fixed time horizon, some risk measures incorporate the dynamic effect of expected trading (such as a [[Order (exchange)|stop loss order]]) and consider the expected holding period of positions.<ref name="Dowd" />

The VaR risk metric summarizes the [[Probability distribution|distribution]] of possible losses by a [[Quantile function|quantile]], a point with a specified probability of greater losses. A common alternative metric is [[expected shortfall]].<ref name="Jorion" />