Advantages and disadvantages of VAR?

Another titbits…most likely not in Schweser. Please share your mnemonics if you have one.

Advantages:

-Single, easily understood measure

-Market standard risk measure

Disadvantages:

-Single measure gives limited information.

-Can be difficult to estimate for complex organizations and portfolios

Disadvantages:

  1. May have downside much higher than what is indicated by VAR - since it is the minimum loss - not the maximum.

  2. Can be gamed - by various means.

  • This in itself requires separate mnemonics.
  1. Is not additive.

Advantages:

Quantifies potential losses in simple terms, is well known and versitile, Interpreted the same no matter what assets are in question, used with the awareness of its limitations can provide usefull information.

Disadvantages:

Estimation methods can give a wide variety of different results, can lull users into a false sense of security, often underestimates the magnitude and frequency of the worst returns, individual VaR does not aggregate easily into total VaR, does not incorporate positive results into risk profile (gives an incomplete picture of overall exposure).