| Value at Risk -
June 15th, 2008
Value-at-risk became popular with trading organizations during the 1990s. It was during this period that the name "value-at-risk" entered the financial lexicon. However, VaR measures had been used long before this.
An early user was Harry Markowitz. In his groundbreaking (1952) paper Portfolio Selection, he adopted a VaR metric of single period variance of return and used this to develop techniques of portfolio optimization. In the early 1980s, the United States Securities and Exchange Commission (SEC) adopted a crude VaR measure for use in assessing the capital adequacy of broker-dealers trading non-exempt securities. A couple years later, Bankers Trust implemented a VaR measure for use with its RAROC capital allocation system. During the late 1980s and early 1990s, a number of institutions implemented VaR measures to support capital allocation or market risk limits.
In the early 1990s, three events popularized value-at-risk as a practical tool for use on trading floors:
• In 1993, the Group of 30 published a groundbreaking report on derivatives practices. It was influential and helped shape the emerging field of financial risk management. It promoted the use of value-at-risk by derivatives dealers and appears to be the first publication to use the phrase "value-at-risk."
• In 1994, JP Morgan launched its free RiskMetrics service. This was intended to promote the use of value-at-risk among the firm's institutional clients. The service comprised a technical document describing how to implement a VaR measure and a covariance matrix for several hundred key factors updated daily on the Internet.
In 1995, the Basel Committee on Banking Supervision implemented market risk capital requirements for banks. These were based upon a crude VaR measure, but the committee also approved the use of banks' own proprietary VaR measures in certain circumstances.
These three initiatives came during a period of heightened concern about systemic risks due to the emerging—and largely unregulated—OTC derivatives market. It was also a period when a number of organizations—including Orange County, Barings Bank, and Metallgesellschaft— suffered staggering losses due to speculative trading, failed hedging programs or derivatives. Financial risk management was a priority for firms, and value-at-risk was rapidly embraced as the tool of choice for quantifying market risk. It was implemented by financial firms, corporate treasuries, commodities firms and energy firms. | 
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