What are the limitations of Value at Risk (VaR)?

What are the limitations of Value at Risk (VaR) in risk management?

Value at Risk (VaR) has several limitations, including its inability to predict extreme market events and reliance on historical data.

Can you explain why VaR doesn't account for tail risks?

VaR focuses on a specific confidence level, which means it may overlook extreme losses that occur beyond that threshold.

Are there better alternatives to VaR for measuring risk?

Yes, alternatives like Conditional Value at Risk (CVaR) and stress testing can provide a more comprehensive view of risk.

How does VaR handle non-normal distributions?

VaR assumes normal distribution of returns, which can be misleading in cases of skewed or fat-tailed distributions.

What industries rely heavily on VaR for risk assessment?

Financial institutions, such as banks and hedge funds, commonly use VaR for assessing market risk and regulatory compliance.