It assumes that risk factor moves follow a normal distribution and that the sensitivity of the position's value to those moves is constant. It needs no simulation and is easy to calculate, but it can underestimate VaR when the actual distribution has fat tails, and it does not suit products such as options whose value does not move in proportion to market moves.
Variance-covariance method
- Japanese
- 分散共分散法
- Last reviewed
- September 26, 2026
This is a draft, shown for review before publication.
The variance-covariance method assumes profit and loss follow a normal distribution and calculates VaR by multiplying the standard deviation of profit and loss by a factor set by the confidence level.