What is value at risk (VaR)?

What is value at risk (VaR)?

Approach: Define as loss threshold over horizon with given confidence.

VaR_α is the loss level such that P(L > VaR_α) = 1-α over given time horizon. Example: 95% 1-day VaR = $1M means 5% chance of losing >$1M tomorrow.

Follow-up: What are its limitations?

Key concepts: quantile, loss distribution, risk management.