Value at Risk (VaR) is a popular metric used in risk management. While it gained popularity in the 1980s after the market crash of 1987, today it is being scrutinized after the market crash of 2008 due to extreme tail events that were not properly identified or mitigated.
Visibility into the behavior of the tail or the distribution
of the simulated paths is generally not communicated to the
stakeholders that use the metric. These simulated paths, while
having low probability, have the potential to cause serious
harm to trading operations. However, new visualization
techniques are emerging that make it possible to increase
transparency around risk, enhance process efficiencies, and
boost revenue opportunity.
But first, let's look at two main challenges. One of the
primary problems with VaR is the fact that it is just a single
number. Nothing about the behavior on the extreme tail or the
distribution of the simulated paths is generally communicated
to the stakeholders that use the metric.
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