Why does the curriculum state that measuring credit VAR requires focusing on the upper distribution of market returns, and that is is based on gains on market positions held? The quote is below, and the page number is 250 in Risk Management Book.
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Variables like return standard deviations and stock betas are all market related. So the calculated VAR represents only the market risk. If you take 5% probablity only market risk is covered. Now, if you need to calculate the credit risk you should look at the right tail, why, becuase the right tail has maximum returns that are compensation for the the credit risk taken. You got maximum returns becuase some credit risk paid off, meaning, defaults did not happen.
I think more generally, credit risk is the risk you don’t get paid. You are only at risk of getting paid when you have a gain/money owed to you. If you have money owed to you, you’re at the right tail.
Vs. VAR where you’re measuring you’re loss.
here a more recent thread: https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91339687#comment-91819557
I suspect that someone who was a Level III candidate 6 years ago couldn’t care less about a more recent thread.