Are there standard horizons, percentiles, and lookback windows for VaR reports?

Question

AcadiFi · Accepted Answer

There are common conventions, but the setup depends on purpose. A trading desk may use one-day 95 percent or 99 percent VaR for internal risk monitoring. Regulatory market-risk frameworks have historically emphasized 10-day horizons and high confidence levels, often with minimum historical observation requirements. Risk committees may also review multiple horizons and confidence levels to understand sensitivity.

Suppose Northgate Securities reports daily trading VaR internally at 99 percent using two years of history. It also converts the measure to a 10-day equivalent for capital discussion and runs 95 percent VaR for management communication. These numbers serve different users. The one-day number helps monitor near-term trading loss. The 10-day number better reflects liquidation or regulatory horizon assumptions.

The FRM lesson is that horizon, confidence, and lookback window are model design choices. Higher confidence focuses deeper in the tail but gives fewer exceptions for backtesting. Longer horizons may require scaling or direct horizon estimation. Longer lookbacks add data but may include stale regimes. There is no single magic configuration. A defensible VaR setup must match the portfolio, decision, and reporting requirement. On the exam, also state the horizon, confidence level, data source, modeling assumption, and validation step, because those choices usually explain why two reasonable VaR answers differ materially. Practice more in our FRM question bank.

Are there standard horizons, percentiles, and lookback windows for VaR reports?

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