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Excel Spreadsheet Model to Calculate Value at Risk (VaR)
For versions of Excel: Excel for Office 365, Excel for Office 365 for Mac, Excel 2016, Excel 2016 for Mac, Excel 2013, Excel 2011 for Mac, Excel 2010, Excel 2008 for Mac, Excel 2007
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.
Value at Risk Monte Carlo Simulation in Excel
There are two video tutorials included focused on value at risk with Excel. The first one defines VaR and demostrates the calculation of parametric VaR deterministically based on historical mean and variance. The second tutorial demonstrates the calculation of value at risk with Monte Carlo simulation in Excel.