Application Of The VaR Basic Model And Its Extended Model In Financial Risk Management

VaR has evolved into a current industry standard for estimating risks of financial loss. This paper summarizes the conception of VaR and the main computational methods based on existing research both in china and abroad. Though the basic model of VaR has been accepted widely by many experts, scholars, practitioners and so on, it has hardly considered over credit risks and liquidity risks, so it may underestimate the real risk.This paper makes further analysis on the limitation of the basic model of VaR, summarizes the literatures which introduce the credit risk to VaR models. In particular , the CreditMetrics Model of J. P.Morgan is presented explicitly as well as its application in the bond market of China. What's more, a new VaR model which takes the liquidity risk into account has been built by the author.In the end, 10 stocks selected stochastically from the Chinese stock exchanges are used to test the new model and the results turn out to approve that the real risk may be underestimated by those VaR models which ignore the liquidity risk.