Ding Kaixiang

Haixia College of Business Xiamen University of Technology International Business

Abstract：

This paper reviews the application of Value at Risk (VaR) models in market risk measurement for financial institutions. Driven by evolving financial regulations and market volatility, effective risk management is crucial. The study examines VaR's theoretical foundations, development, and practical applications, including historical simulation, variance-covariance, and Monte Carlo methods. It analyzes VaR's limitations, such as its inability to capture extreme tail risks and reliance on distributional assumptions, alongside improvements like ARCH/GARCH models, Extreme Value Theory (EVT), and stress testing. Special attention is paid to VaR's applicability in the Chinese financial market, characterized by high volatility and policy influence. The findings affirm VaR's indispensable role in quantitative risk management, emphasizing the need for localized adaptations and exploring coherent risk measures like Conditional Value at Risk (CVaR) to enhance robustness and accuracy in diverse market environments.

Key Words：

VaR model; market risk; financial institutions; risk measurement; literature review