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Introducing Value at Risk (VaR) and Conditional Value at Risk (CVaR)

Sep 11, 2013 Marc Odo

With the release of StyleADVISOR 8.4, Zephyr Associates is incorporating Value at Risk (VaR) and Conditional Value at Risk (CVaR) into our array of risk measures.  In the context of the Zephyr StatMAP, both VaR and CVaR are measures of tail risk.

Value at Risk is defined as the amount of expected losses under rare-but-extreme market conditions.  It is a breakpoint that is seldom breached, but sometimes is.  Conditional Value at Risk explores what happens when the VaR breakpoint is breached.  StatFACT sheets have been created for both of these metrics in order to give you plain-English explanations of what these measures are, how they are useful, what the limitations are, and what a “good” number should be.

There are numerous ways one can calculate VaR and CVaR.  StyleADVISOR gives you many different options when it comes to implementing your VaR and CVaR models.  You have flexibility when choosing the shape of the probability distribution, the confidence level cut-off, the periodicity of the data, and the responsiveness of VaR/CVaR to shifting market conditions.  To assist you with your understanding of these models we have an academic-level paper by Dr. David Kirkman and a practitioner-level paper by Marc Odo available for download.

We hope you find this information useful in the understanding and application of these new risk measures.

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