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RiskMetrics (f/k/a Institutional Shareholder Services - "ISS") Risk & Governance Blog, January 7, 2009 article

 

 

 

 

 

 

 

  

 

 

 

 

 

Wednesday, January 7, 2009

Value-at-Risk as an Altimeter
Submitted by: Gilles Zumbach, Senior Researcher, Risk Management

In a recent New York Times Magazine cover story, the efficacy of VaR, or Value-at-Risk, was debated. The reference by one risk manager to VaR as an altimeter was perfect and deserves further thought.

VaR as an Altimeter
An altimeter is a reliable but imperfect instrument: essentially it just measures the air's pressure. You can calibrate on the ground before take-off, land five hours later, and find the instrument 100 meters off while on the runway (I have seen it many times). A possible remedy would be just to throw away all altimeters as junk. In practice, every pilot "just looks outside," and, when needed, correct the possible discrepancy between the altimeter and the actual altitude. The point is not to believe blindly the instrument. And, despite the altimeter limitation, every plane in the world includes one at the center of the dashboard as it gives (albeit imperfectly) very important information during a flight.
 

 

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