A Bit of History
Value at Risk was created at JP Morgan by Till Guldimann. It then emerged as a real concept in the late 1980’s. It was developed to segregate the Black Swans (un-warranted extreme events) in the market. The reason for this was that they hoped black swans would be preceded by an increased VaR. However, abnormal markets and abnormal trading was excluded from the VaR estimate in order to make it observable. The reasoning behind this was that it was not always possible to define loss if markes are closed, such as after 9/11, or if markets are severely illiquid. Risk could also be difficult to define if the risk-baring institution fails or breaks up.
Value at Risk was used in well established quant trading groups at several financial institutions, notably Bankers Trust. They would use the information to create the “4:15 report” that JP Morgan’s CEO Dennis Weatherstone decided to call for. This report shows firm wide risk and it is available within 15 minutes of the market close.
In 1993 the annual conference was help and people’s interest peaked by VaR. JP Morgan was asked to sell their software to their clients. However, the request was declined by JP Morgan due to the fact that they were not a software company. They came up with a mean by which their clients could calculate VaR for themselves. They published their methodology, distributed the necessary covariance matrix, and encourage software vendors to develop compatible software. In 1994, VaR was exposed to the public for the first time with free access to estimates of the necessary underlying parameters RiskMetrics was the company that decided to make this possible.. They created a detailed technical document as well as a covariance matrix for several hundred key factors which as updated daily. Both of these items were distributed to clients for free. No more than two years later, RiskMetrics spun off into an independent for-profit business that is now part of RiskMetrics Group.
Value at Risk was created at JP Morgan by Till Guldimann. It then emerged as a real concept in the late 1980’s. It was developed to segregate the Black Swans (un-warranted extreme events) in the market. The reason for this was that they hoped black swans would be preceded by an increased VaR. However, abnormal markets and abnormal trading was excluded from the VaR estimate in order to make it observable. The reasoning behind this was that it was not always possible to define loss if markes are closed, such as after 9/11, or if markets are severely illiquid. Risk could also be difficult to define if the risk-baring institution fails or breaks up.
Value at Risk was used in well established quant trading groups at several financial institutions, notably Bankers Trust. They would use the information to create the “4:15 report” that JP Morgan’s CEO Dennis Weatherstone decided to call for. This report shows firm wide risk and it is available within 15 minutes of the market close.
In 1993 the annual conference was help and people’s interest peaked by VaR. JP Morgan was asked to sell their software to their clients. However, the request was declined by JP Morgan due to the fact that they were not a software company. They came up with a mean by which their clients could calculate VaR for themselves. They published their methodology, distributed the necessary covariance matrix, and encourage software vendors to develop compatible software. In 1994, VaR was exposed to the public for the first time with free access to estimates of the necessary underlying parameters RiskMetrics was the company that decided to make this possible.. They created a detailed technical document as well as a covariance matrix for several hundred key factors which as updated daily. Both of these items were distributed to clients for free. No more than two years later, RiskMetrics spun off into an independent for-profit business that is now part of RiskMetrics Group.