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Foreign Exchange

Lower VaR to boost liquidity?

I was given an interesting thought this week by a contact. “Now that the Lehman debacle is more than one year behind us, those extreme days are rolling off most banks’ VaR calculations. In my case, I’ve seen a dramatic drop in VaR over the past two weeks. Most banks and macro funds use VaR or some variant that looks at the past year’s worth of data, and will now be encouraged, if only indirectly, to take on more risk,” he says, adding: “Many client credit systems work similarly, so clients will also be able to come to the party.”


Talking around, there seems to be a consensus that there is some truth in what he is saying. One prominent buy sider adds a caveat though. “I guess most people/desks/funds have their own variation of VaR or similar risk models and most will scale positions down when VaR is higher and vice versa,” he says.


“That said, one thing last year taught many people was that tail risk exists and can happen in ways that most people previously scoffed at, so although you may weight risk models with a heavier one-year look back, most models now pay more attention than previously to a longer look back – possibly over 10 years in defining ‘extreme’ risk.



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