VALUE-AT-RISK (VAR) AND ITS LIMITATIONS IN PORTFOLIO RISK ASSESSMENT

Abstract

Value-at-Risk (VaR) is one of the most widely used risk management tools in finance for assessing potential losses in a portfolio over a given time horizon with a specified level of confidence. Despite its widespread use, VaR has notable limitations, particularly in accurately assessing extreme risk scenarios and providing actionable insights during periods of high market volatility. This paper explores the concept of VaR and its application in portfolio risk assessment, while critically analyzing its limitations. Using a combination of theoretical models and empirical data from global financial markets, the study evaluates the effectiveness of VaR in predicting portfolio risk, especially during times of financial crises. The study also examines the alternative risk assessment models that address the shortcomings of VaR. The paper concludes with policy recommendations for enhancing the robustness of risk management frameworks using VaR and other complementary tools.