What is VaR (Value at Risk)?

VaR is a statistical estimate of the size of the loss that could occur over a given period at a given confidence level.

For example, the criteria for determining the risk grade of investment products require funds that are more than 3 years past their establishment to be assigned one of 6 market risk grades based on a 97.5% VaR calculated from daily returns over the past 3 years. Because it is based on historical data, it may underestimate losses in extreme situations.