Shared by JohnH

From 1997!

Against VAR

By Nassim Taleb

Philippe Jorion is perhaps the most credible member of the pro-VAR camp. I will answer his criticism while expanding on some of the more technicalstatements I made during the interview (Derivatives Strategy, December-January).Indeed, while Jorion and I agree on many core points, we mainly disagreeon the conclusion: mine is to suspend the current version of VAR as potentiallydangerous malpractice, while his is to supplement it with other methods.

My refutation of VAR does not mean that I am against quantitative riskmanagement-having spent most of my adult life as a quantitative trader,I learned the hard way the pitfalls of such methods. I am simply againstthe application of unseasoned quantitative methods. I think that VAR wouldbe a wonderful measurement if financial models were designed for that purposeand if we knew something about their parameters. The validity of VAR islinked to the problem of probabilistic measurement of future events, particularlythose deemed infrequent (more than two standard deviations) and those thatconcern multiple securities. I conjecture that the methods we currentlyuse to measure such tail probabilities are flawed.