VaR Limitations

Value at Risk (VaR) estimates the potential loss a portfolio might face over a specific period, under normal market conditions. However, its limitations include assuming historical data accurately predicts future risks, which isn't always true, especially during rare or extreme events. VaR doesn't indicate the size of losses beyond its cutoff point, potentially underestimating severe risks. It also relies on market models that may ignore sudden market changes or crashes. Therefore, while useful, VaR shouldn't be solely relied upon for risk management, as it may present an overly optimistic view of potential financial setbacks.