Value at risk (VaR) is a technique that determines estimates of the potential loss in the market value of a portfolio over a certain period of time at a given confidence level.

VaR is a measure of how much money a portfolio can lose, considering all its components and positions, over a specified period, such as 1 day, 10 days, or 1 year in a worst case scenario (bottom 1 percent). Losses may arise from diffusive moves (general VaR) or defaults or credit migrations (incremental risk charge), or the so-called special events (specific risk).

The VaR of a portfolio is the maximum loss that the portfolio can incur over a certain time interval and still fall within a designated confidence bound. For example, if a portfolio has a one-day 95% VaR of 1,000,000 USD, then 95% of the time the portfolio stand to lose less than 1,000,000 USD over the course of the next day. In other words, the portfolio will lose more than 1,000,000 USD only about once every 20 business days.