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Value at Risk Spreadsheet Example in Excel

Value at Risk (VaR) is a statistical measurement of downside risk applied to current portfolio positions. It represents downside risk going forward a specified amount of time, with no changes in positions held. VaR can be calculated for any time period however, since uncertainty increases with time it is often calculated for a single day or several days into the future.

VaR Methods

There are two major methods for calculating VaR:

Using historical data or empirical data, referred to as non-parametric.

Using an approximation based on some theoretical probability distribution such as the normal distribution.

What is VaR Supposed to do

VaR is supposed to represent a worst case scenario such that there is a low probability that actual losses will exceed the calculated VaR. So for a 95% confidence level VaR represents a downside movement of 1.645 sd and for a 99% confidence level it represents a downside move of 2.33 sd. When calculating VaR, we are actually calculating a mean VaR based on some pre-specified confidence level. The drawback is it is not possible to estimate how large a loss may be if the downside move exceeds the confidence level.