How Informative are Value-at-Risk Disclosures?

Abstract

Value at Risk (VAR), a measure of the dollar amount of potential loss from adverse market moves, has become a standard benchmark for measuring financial risk. Spurred by regulators and competitive pressures, more institutions are reporting VAR numbers in annual and quarterly financial reports. To provide preliminary evidence on the informativeness of these new disclosures, I investigate the relation between the trading VAR disclosed by a sample of U.S. commercial banks and the subsequent variability of their trading revenues. The empirical results suggest that VAR disclosures are informative in that they predict the variability of trading revenues. Thus, analysts and investors can use VAR disclosures to compare the risk profiles of trading portfolios.

Keywords: Derivatives, risk management, value at risk, disclosure regulation, market risk disclosures, Basel Committee, SEC

JEL Classification: G14, G21, G28, M41, M45