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2009-02-16 — finalternatives.com
A common criticism of VaR has been that it does not measure the tail risk correctly. The criticism is correct to the extent that the VaR method could have predicted the dramatic losses seen in the markets. The fallacy of the argument is that VaR is not designed to predict tail events. VaR is defined as the “maximum/minimum loss that an investment is likely to suffer at most/least x% of the time.†VaR does not contain any information of the magnitude of the loss beyond the confidence interval, and thus cannot be used to estimate the tail loss.
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