Value at risk

The loss a portfolio should not exceed on a given proportion of days.

With 1.8% daily volatility and a normal assumption, the 95% one-day figure is about 2.96%.

Its defects are well documented and were demonstrated expensively in 2008. It says nothing about the size of the loss when the threshold is breached, it depends on a distributional assumption markets violate, and it is usually estimated from a recent period that was calm.

The measure became a regulatory standard, which is why it persists despite the criticism.

Never let it be the only risk number in the room.

The regulatory version has a further weakness worth knowing. Because it is estimated from a recent window, it falls during calm periods, which permits larger positions exactly when risk is accumulating, and rises after a shock, which forces selling exactly when liquidity is worst. That procyclicality was one of the mechanisms that amplified the 2008 crisis.