Historic Value At Risk (Historic VAR)

Historic VAR is a technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities. Historic VAR is able to measure risk at the time it is occurring and is an important consideration when firms make trading or hedging decisions.

This involves running the current portfolio across a set of historical price changes to yield a distribution of changes in the portfolio value and computing a percentile. The percentile output is the historic VAR.

In the custom report tool, numerous options can be selected in order to obtain an appropriate VAR value. First, a confidence level (90%, 95%, or 99%) must be selected. Second, the “period at risk” must be selected (daily, weekly, or monthly).

The calculation needs a minimum of 500 historic daily price movements and will use a maximum of 1,000. The prices used are up to the latest price, and less than 500 points will yield no result. Dependent on the length of each instrument, the automatic selection is to use the maximum length of daily data points up to 1,000.

 

In short historic VAR requires 3 main elements:

1. Time period - always set to 5 years in Analytics.

2. Confidence level - selectable by the user at either 90%, 95% or 99% levels.

3. A series of price returns.

 

A historic VAR of -5% at a 95% confidence level means that for a fund or portfolio we can expect, with 95% confidence, that we will see a maximum loss of 5% on any one day.