VaR: What is it really good for? We look for the answer by examining various value at risk (VaR) measures for a sample of 121 CTA programmes with track records running from the start of 2000 to July 2011. VaR is a well-known risk measurement tool, especially applied to measure past realizations of market risk.

Central in setting capital requirements for banks under the Basel Accord, VaR acts also as a risk management tool. However, is it a valid risk management tool? The answer lies in VaR’s predictive power. How useful are VaR measures in predicting future performance rather than describing past performance?

VaR as a measure of market risk
VaR methods were invented in the late 1980s and flourished in the 1990s, boosted by events like the October 1987 crash and the LTCM failure. Accompanied by risk scenarios and stress-testing, VaR became the regulatory norm for banks, as well as a standard reporting measure for managed funds.

The last financial crisis proved VaR’s weaknesses as a risk measurement and management tool, when the observed losses appeared to be millionth year events by the existing VaR measures. Subsequently VaR fell out of favour with practitioners. The initial success of VaR was occasioned by its relative ease of calculation and its conceptual intuitiveness.