Explain valid criticisms of Value at Risk

Question

Explain valid criticisms of Value at Risk.

Answer 1

Certainly, there are also valid criticisms too:

• This does not tell you what the loss will be beyond the value at risk value
• Value at risk is concerned with typical market circumstances, not the many more events
• This uses historical data, 'like driving a car through looking in the rear-view mirror only'
• In the time horizon positions could modify dramatically (because of normal trading or because of hedging or expiration of derivatives).

A common criticism of traditional Value at Risk has been that this does not satisfy all of specific commonsense criteria.