Value at Risk (VaR)

A loss threshold unlikely to be exceeded over a given period at a set confidence level.

VaR estimates a loss level that a portfolio is not expected to exceed over a defined period under normal market conditions, at a given confidence level. A 1-day 95 percent VaR of 1 million dollars means there is a 5 percent chance of losing more than that in a single day. It is not a worst case, since tail losses can be far larger, which is its main criticism.

The bank calculated its one-day Value at Risk (VaR) at $5 million, meaning losses should exceed that only about once every 20 days.