Is VAR a useful tool in volatile markets?

Value-at-risk models have been slammed for failing to adapt to increased volatility during the financial crisis, leading to high numbers of VAR exceptions. Did VAR models fail? By Patricio Contreras


Value-at-risk models have been criticised for their performance during the financial crisis. As volatility across asset classes jumped to unprecedented highs in 2007 and 2008, many banks reported a sharp increase in the number of VAR exceptions – that is, days when trading losses exceed the daily VAR estimate. Critics say this proves VAR models were unable to anticipate and measure the impact of extreme shocks on their portfolios, resulting in record losses for the banking system.

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