A comparaison of the effectiveness of the VaR and the CoVar as measures of financial risk

Abstract

Financial institutions rely on a risk model known as the Value-at-Risk (VaR) to gauge the risks taken by their businesses. In the literature, it has been noted that this method has some key flaws, especially given the fact that this mesure is based on the assumption of normal distribution of asset returns. To over come the flaw of Var, some research has proposed alternative mesure of risk: the conditional VaR (coVaR). The purpose of this research is to compare and discuss these two methods.