**VaR – Blossoming Econometrics**, and kindly contributed to R-bloggers]. (You can report issue about the content on this page here)

Want to share your content on R-bloggers? click here if you have a blog, or here if you don't.

When you are in 101 of risk management is usual to confuse Bar, VAR and VaR, the first one refers to a place that you should buy (it is a bad idea, do not do it), the second is Vector Autoregressive and the last one Value at Risk, our matter.

**What is Value at Risk?**

In simple words, it is the maximum possible loss of your money in a period and the formal definition is:

VaR is a method of assessing risk that uses standard statistical techniques used routinely in other technical fields. Loosely, VAR summarizes the worst loss over a target horizon that will not be exceeded with a given level of confidence.

(Jorion, 2007)

**How to compute? **

There are two methods to compute

- Parametric
- No Parametric

The parametric method assumes

that the returns follow a normal distribution, hence the VaR of a portfolio is:

**F Factor of confidence level**

**S Total
amount of the investment**

**σ Volatility
**

**R** **Code **

`library(pacman)`

p_load(tidyverse,tidyquant)

**Import dataset Technical Trading Rule Composite Data **

`data(ttrc)`

data <- as_tibble(ttrc)

**Select Close prices **

`close <- data %>% `

select(Close)

**Parametric VaR function **

`VaRP <- function(x,p,s,t){`

x1 <- as.numeric(unlist(x))

r1 <- (x1/lag(x1))-1

r1 <- as.numeric(unlist(r1))

sig<- sd(r1,na.rm = T)

p <- as.numeric(qnorm(p))

h <- sqrt(t/252)

pvar <- sig**p**h*s

print(paste("The VaR is $",prettyNum(pvar,big.mark = ",")))

}

**Arguments**

**x Object
that contains close prices **

**p Percent
confidence level**

**s Total
amount of the investment**

**t Time
horizon (days)**

## Example

Using the close prices of ttrc , we want to know the VaR of $ 100 million, with a holding period of 7 days and 99 confidence level

`VaRP(close,.99,100000000,7`

)

`[1] "The VaR is $ 552,757"`

There is a simple way to compute parametric VaR. I know you can improve it. In future posts I am going to show how to compute with no parametric methods.

**Reference**

De Lara, A. (2018) Medición y control de riesgos financieros.

México: Limusa

Jorion, P.

(2007). Value at Risk. McGraw Hill.

**leave a comment**for the author, please follow the link and comment on their blog:

**VaR – Blossoming Econometrics**.

R-bloggers.com offers

**daily e-mail updates**about R news and tutorials about learning R and many other topics. Click here if you're looking to post or find an R/data-science job.

Want to share your content on R-bloggers? click here if you have a blog, or here if you don't.