Title: What's the difference between a confidence level and a confidence interval in Value at Risk (VaR)?
Headings: Confidence Level and Confidence Interval in Value at Risk (VaR)
Confidence Level and Confidence Interval in Value at Risk (VaR)
Key Takeaways
Value at Risk (VaR)
Confidence Level
Confidence Interval
VaR Portfolio Comparison

Content: With VaR modeling, managers can identify investments that have higher-than-acceptable risks, allowing them to reduce or exit positions if needed. One criticism of VaR and other risk assessment metrics is their potential for understating risks and their inability to account for black swan events. Confidence Level
The confidence level determines how sure a risk manager can be when they are calculating the VaR. The confidence level is expressed as a percentage, and it indicates how often the VaR falls within the confidence interval. If a risk manager has a 95% confidence level, it indicates he can be 95% certain that the VaR will fall within the confidence interval. For example, assume that a risk manager determines the 5% one-day VaR to be $1 million. This means that he has a 95% confidence level that the worst daily loss will not exceed $1 million. Although a risk manager can choose any number of probabilities, it is most common to use a 95% or 99% confidence level. Confidence Interval
Conversely, the confidence interval is a statistical measure that produces an estimated range of values that is likely to include an unknown population parameter. For example, suppose a risk manager is measuring the confidence interval of an investment portfolio. He finds it to be $2 million and $10 million at the endpoints.