What does VaR assume as a risk measure?
Just about every VaR model assumes that the portfolio under consideration doesn’t change over the forecast horizon. This is a fiction, especially for trading portfolios, but trying to incorporate forecasts of position changes into a model forecasting returns is very complicated. VaR models also assume that the historical data used to construct the VaR estimate contains information useful in forecasting the loss distribution. Some VaR models go further and assume that the historical data themselves follow a specific distribution (e.g., a “normal distribution” in RiskMetrics(TM)).
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- What does VaR assume as a risk measure?
