1. Generally, VaR is an estimate of the maximum potential loss expected over a fixed time period at a certain probability or confidence level. In practice, VaR models aggregate several components of price risk into a single quantitative measure of the potential for loss.
2. Risk management and control guidance for securities firms and their supervisors. A report by the Technical Committee of IOSCO - May 1998
3. A 'fat tail' means that a greater number of extreme events (such as significant price changes) occur than would be implied by a normal distribution.
4. Some firms currently use models that assume a normal distribution, whereas market returns are not normally distributed. However, the experience of the Basle Models Taskforce, for instance, was that there was no systematic difference between the results of banks using the historical simulation approach and variance / co-variance.
5. This implicit buffer is supplemented in many regimes by explicit buffers. For example, most regulators require a minimum level of capital to be in business, and securities firms operating in the European Union under the Capital Adequacy Directive (CAD) must maintain capital equal to one quarter of their previous year's fixed overheads (to help ensure an orderly wind-down of the firm). Of course, these only act as additional buffers to the extent that they add to capital required against market and credit risk (for most firms they would not bite). In addition, some regulators (eg the UK banking supervisors) require higher capital ratios for higher risk firms.
6. See footnote 2.