VAR: risk mitigant or amplifier?
Value-at-risk is a far-from-perfect risk measure. Jon Danielsson, Ulrich Klueh and Laura Kodres take a close look at the lessons to be learnt from its use in stressful or volatile periods, such as the current financial crisis
The current financial market crisis has elicited accusations that mechanistic adherence to risk management systems, such as value-at-risk (VAR) market risk measures, may have been a contributing factor. The model in the box opposite explores how, in combination with desired capital levels, risk management techniques - including VAR-type techniques - can lead to destabilising asset price behaviour
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