Financial institutions face hidden risks with widely used risk measure.
The article discusses how modern risk management systems were created in the 1990s to measure risk in financial institutions. One common measure used is Value at Risk (VAR), which calculates risk based on current positions. However, VAR has limitations as it only works well under normal market conditions, not extreme ones. Despite this, the same system can be used for stress tests, which are important for managing risk. Risk managers should be aware of the limitations of their risk models.