Representing Evidence-Public Policy and Evaluation A2 Coursework

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The Value at Risk model works on the lines of probability and statistics to measure a drop in value of asset over a period of time. In general, it is calculated between the confidence level of 1% and 5%. There are various methods for measuring the Value at Risk for a project including the Variance -- Covariance methods, the Risk Metrics Contribution method, Historical Simulation methods, and Monte Carlo simulation methods. While, these methods are simple to use and compute the potential level of risk involved, these are based on a variety of assumptions. Generally, all approaches involved using historical trends and data and probability distributions are defined based on historical trends. A major problem with Value at Risk model is that it does not take into account the changing conditions and trends and it still claims to compute risk in rare conditions.

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Over a period of time risk managers have been arguing and criticizing Value at Risk model for exploiting investors by making them put invest their money in high risk portfolios. Since VaR involves defining and assigning probability distributions to individual risks, academic researchers argue that the combined Value at Risk for a wholly project can be much more then the individual Value at Risk of an element of the portfolio (Einhorn, 2008). Academics also accuse that Value at Risk approach tempts the financial institutions to take impractical risks (Nocera, 2009).

Proposed Research

We propose to evaluate the extent to which it is pragmatic to depend upon the conventional Value at Risk model. We plan to assess the results by applying alternative risk measurement tools to the investment portfolios and then compare their results with the outcomes produced by the Value at.....

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