Tuesday, February 16, 2010
A good VaR disclosure
The calculation of VaR requires numerous assumptions and thus VaR should not be viewed as a precise measure of risk. Rather, it should be evaluated in the context of known limitations. The limitations include but are not limited to the following: VaR measures do not convey the magnitude of extreme events; historical data that forms the basis of VaR may fail to predict content and future market volatility; and VaR does not fully reflect the effects of market illiquidity (the inability to sell or hedge a position over a relatively long period).
I think this is great wording; it would serve anyone who reports VaR quite well. If you've got a better example, please let me know!
(Source: Lecturing Birds on Flying. Pablo Triana. Page 145)