Quants weigh up VAR's flawed alternatives
The Basel Committee will consider ditching value-at-risk as the basis for trading book capital, but an obvious alternative, expected shortfall, has problems of its own. Laurie Carver reports
After 16 years as the regulator-approved standard for the calculation of trading book capital, value-at-risk could soon end up on the scrapheap. The Basel Committee on Banking Supervision is preparing to launch a review of trading book rules, and sources say one stream of work will look at alternatives to VAR, such as expected shortfall – which aims to do a better job of capturing potential losses in difficult market conditions.
That reflects one of the charges levelled at VAR in recent years
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