Statement:
A 1% VAR would be expected to show greater risk than a 5% VAR.
Query:
Can someone please kindly explain why would it be risker? My understanding is that the 1% means a higher confidence level for the VAR, thus less risk. Thanks!
Jay
why not look at it this way; 5% means a highly probable minimum loss which should mean a fairly lesser loss amount; a 1% probability however would correspond to a significant loss value i.e for a loss to be highly significant then it should be the case that it probability should be lower in relative terms.
hope it helps…
5% var is the left 5% tail point of your distributions of expected returns. 1% var is a point even farther on the left, therefore worse, and showing a greater risk when s**t really hits the fan.