Why Value at Risk Assumes the Portfolio Is Not Traded

Summary

The question concerns the no-trading condition in a one-day Value at Risk statement. The answer explains that VaR describes the potential loss distribution of a specified portfolio over a stated horizon. If positions change during that horizon, the portfolio’s exposures and risk characteristics can change, so the original VaR estimate no longer describes the same holdings. Liquidating or replacing assets can alter the portfolio’s sensitivity to market moves and credit events.

The document offers a brief conceptual explanation rather than a calculation or empirical example beyond the quoted VaR illustration in the question. Its wording treats market movements as random and frames trading as a change to portfolio parameters, but it does not distinguish rebalancing conventions, intraday monitoring, or alternative VaR horizons. The core takeaway is that the no-trading clause holds portfolio composition fixed so the stated loss probability refers to a stable set of exposures; once trades occur, risk must be reassessed for the changed portfolio.

Key ideas

• VaR describes losses for a portfolio whose positions are held fixed over the stated horizon.
• Trading can change exposures and therefore change the portfolio’s loss distribution.
• Liquidating or replacing assets may alter market and credit risk characteristics.
• A VaR estimate should be interpreted in relation to the portfolio composition used to calculate it.

Tags

# Understanding the VaR example on wikipedia


# Understanding the VaR example on wikipedia












In the wikipedia page on VaR

The example says:

```
For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one day period if there is no trading.
```

What is the reason for the clause 'if there is no trading'?

## Answer by aajajim (score 0, accepted)

https://quant.stackexchange.com/a/10086

I think it's related to the parameters of your portfolio! Indeed, as it's a 1-Day VaR, then it tells you that you have 5% propability that your portfolio would fall under 1$M, because the market movements are random and you have 5% chances to be on the bad side of these movements. But if you make a trade (or completely liquidate your position on this portfolio) than you will change the parameters (for example : credit default probability will change if you swap a CCC bond with a AAA bond) of your portfolio!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.