Discussion on the Method of VaR in Risk Management

Abstract

Value-at-risk, which is usually abbreviated to VaR, is widely used in risk management. Three methods of VaR calculation are discussed in the paper from the viewpoint of parameter, which are the historical simulation method, the normal distribution method and the Monte Carlo method. Their effectiveness and limitations in market risk management are also explored under normal market conditions. Each method has its own strengths and weaknesses. which method to use depends on the composition of the portfolio.