Financial markets at risk: New study reveals flaws in risk assessment
Value at Risk (VaR) is a way to measure the maximum potential loss in a financial portfolio with a certain probability over a specific time period. Traditional methods assume normal distribution, but real asset returns often have fat tails. By using extreme value theory and GARCH models, researchers found that dynamic estimation of empirical quantiles can give more accurate VaR estimates for the Chilean financial market than standard methods.