Advantages and Shortcomings of VaR
While VaR is used by numerous financial institutions it is not without its
shortcomings. First, the VaR estimate is based solely on historical data. To the
extent that the past may not be a good predictor of the future, the VaR measure may
under or overestimate risk. There is a continuing debate within the financial
community as to whether the correlations between different financial prices are
sufficiently stable to be relied upon when quantifying risk. There is also debate as to
how best to model the behaviour of volatility in market prices. Nevertheless, if an
institution wishes to avoid relying on subjective judgments regarding likely future
financial market volatility, reliance on history is necessary