The Value-at-Risk (VaR) of a financial position at any particular horizon is the smallest dollar loss incurred in catastrophe scenarios, as defined by some low probability level. Since the risk-management revolution in the mid-1990s, VaR and its refinement—the Conditional Tail Expectation (CTE)—have become the most opted risk measures in the financial sphere. Senior management of financial firms quickly adopted VaR as a transparent summary of risk exposures. This move was further accelerated by the growing volume of over-the-counter(OTC) derivatives business. In-house risk managers commonly use VaR or CTE to control the individual risk exposures of their firms’ traders. The Bank for International Settlements (BIS), within the Basel Accords, promotes the use of multiples of 10-day 1% VaR for capital-adequacy requirements for banking institutions. Recently, to counter the inherent opacity, financial firms have begun to use VaR or CTE to inform private investors of their risk exposures.

This move towards a broader use of the VaR methodology in personal risk management is largely motivated by the current trend that is moving away from defined-benefit (DB) pension plans and in favor of defined-contribution (DC) plans, and by the imminent social security reforms. As a consequence of these “individuals around the world (are) taking on more responsibility for their financial futures.” Accordingly, the RiskMetrics Group introduced RiskGrades and X-Loss (or Loss in Extreme Markets). RiskGrades are VaR measures scaled for investor-friendliness and X-Loss are their CTE counterparts. Also, State Street Associates (SSA) have launched Risk Budget Tool, a private investor-oriented tool to convert portfolio-allocation weights into VaR statistics.

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