Measuring downside portfolio risk - All VaRs for equities are not equal.

Value at risk (VaR) is an approach used in risk management to measure downs ide risk. Not all VaRs, however, are created equal. Defining and accurately measuring market risk is a considerable task. VaR estimates depend on a nu mber of inputs, including assumptions, data parameters, and methodology Acc ordingly, comprehending the optimal use of these various inputs and how the y might impact the VaR forecast is necessary to avoid biasing portfolio ris k estimates. The authors examine three equity portfolios of varying degrees of diversification, using twenty common VaR models developed through four VaR techniques to clearly demonstrate the ramifications of using inappropri ate models. They find that the particular characteristics of a portfolio mu st guide and determine which VaR model may be applied in order to extract a ccurate VaR estimates. Using the wrong VaR model will, bias the behavior of portfolio managers and cause them to be exposed to much more risk than the y desire.