Value at Risk (VaR)

Value at Risk (VaR) is a foundational risk metric used to estimate the maximum potential loss of a portfolio over a given time frame at a specified confidence level.

Definition

VaR answers the question: “What is the worst expected loss over a certain time horizon with X% confidence?”

Example usage A 1-day VaR of $50,000 at 95% confidence means that under normal market conditions, there is only a 5% chance the index will lose more than $50,000 in a single day.

Purpose

OLTA uses VaR to quantify the downside risk of each index, providing institutional investors with a standardized view of potential capital loss under normal market conditions.

Value at Risk (VaR) is a statistical measure used to estimate the maximum potential loss of an investment over a defined period with a given confidence level.

In the context of OLTA, it serves to:

  • Provide institutions with standardized risk disclosures

  • Enable informed comparison between index strategies

  • Reinforce risk-adjusted transparency for structured crypto exposure

Methodology

OLTA applies a historical simulation method as baseline, using trailing price data for each index over a 30-day rolling window.

Parameters:

  • Time Horizon: 1 day and 30 days

  • Confidence Levels: 95%

  • Calculation Frequency: Updated daily

This results in outputs such as:

“At 95% confidence, the 30-day VaR is -12.4%, meaning there's a 5% chance the index could lose more than 12.4% in the next 30 days.”

Calculation

VaRα=−inf⁡{x∈R:P(L>x)≤1−α}{VaR}_{\alpha} = - \inf \left\{ x \in \mathbb{R} : P(L > x) \leq 1 - \alpha \right\}

Or, in simpler terms (discrete returns):

VaRα=μ−zα⋅σ{VaR}_{\alpha} = \mu - z_{\alpha} \cdot \sigma

Where:

  • μ = mean return

  • σ = standard deviation

  • zₐ = quantile of the standard normal distribution at 95% confidence, equal to 1.645.

Integration in OLTA

  • Displayed on fund dashboards and in periodic risk reports

  • Computed daily for high-volume funds

  • Serves as the baseline for additional metrics

Usage in the Protocol

  • Visible in Index Factsheets: Each index will publish its current VaR daily, available via the OLTA dashboard or API.

  • Governance-Driven Thresholds: Excessive VaR values may trigger index review, rebalancing delays, or eligibility reassessment.

  • Complemented by Other Risk Metrics: Including CVaR (expected shortfall), volatility, and drawdown.

Institutional Alignment

By integrating VaR, OLTA aligns with TradFi portfolio standards, helping asset managers and risk committees:

  • Evaluate risk-adjusted exposure

  • Compare index-based strategies under market stress

  • Satisfy internal compliance or regulatory disclosures

Ongoing Review & Audit

As the OLTA protocol matures, VaR reporting and methodology will be subject to:

  • Internal validation reviews by the risk committee

  • External audits by independent financial or quantitative audit firms

This ensures methodological robustness, trustworthiness of public disclosures, and alignment with evolving institutional expectations.

OLTA’s VaR framework is designed to evolve with market data quality and can be extended with parametric or Monte Carlo methods for deeper risk modeling over time.

PreviousIndex Construction RiskNextRisk Analytics

Last updated