Abstract

http://ssrn.com/abstract=1098863
 
 

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Time-Inconsistency of VaR and Time-Consistent Alternatives


Patrick Cheridito


Princeton University

Mitja Stadje


Tilburg University - Department of Econometrics & Operations Research

November 2007


Abstract:     
We show that VaR (value-at-risk) is not time-consistent and discuss examples where this leads to dynamically inconsistent behavior. Then we propose two time-consistent alternatives to VaR. The first one is a composition of one-period VaR's. It has some of the theoretical drawbacks of static VaR and should be used with care in situations where financial positions are not normally distributed or in models with complex dependence structures. The second one is a composition of average VaR's. It is a time-consistent coherent risk measure and provides good results in any situation.

Number of Pages in PDF File: 8

Keywords: time-consistency, value at risk, composed value at risk, composed average value at risk

JEL Classification: D81, G18

working papers series


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Date posted: March 5, 2008  

Suggested Citation

Cheridito, Patrick and Stadje, Mitja, Time-Inconsistency of VaR and Time-Consistent Alternatives (November 2007). Available at SSRN: http://ssrn.com/abstract=1098863 or http://dx.doi.org/10.2139/ssrn.1098863

Contact Information

Patrick Cheridito (Contact Author)
Princeton University ( email )
ORFE
Princeton University
Princeton, NJ 08544
United States

Mitja Stadje
Tilburg University - Department of Econometrics & Operations Research ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
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References:  29
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