Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
36 Pages Posted: 7 Nov 2008
There are 3 versions of this paper
Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
Date Written: October 1999
Abstract
This paper analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using a given risk-management model. We focus on the industry standard, the Value-at-Risk (VaR) based risk management, and find that VaR risk managers often optimally choose a larger exposure to risky assets than non risk managers, and consequently incur larger losses, when losses occur. We suggest an alternative risk management model, based on the expectation of a loss, to remedy the shortcomings of VaR. A general-equilibrium analysis reveals that the presence of VaR risk managers in a pure-exchange economy amplifies the stock-market volatility at times of down markets (and low output) and attenuates the volatility at times of up markets.
Keywords: Risk Management, VaR, Portfolio Choice, Asset Pricing, Volatility
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
By Suleyman Basak and Alex Shapiro
-
Optimal Risk Management Using Options
By Dong-hyun Ahn, Jacob Boudoukh, ...
-
Optimal Risk Management Using Options
By Dong-hyun Ahn, Jacob Boudoukh, ...
-
An Analysis of Var-Based Capital Requirements
By Hong Liu and Domenico Cuoco
-
Optimal Dynamic Trading Strategies with Risk Limits
By Domenico Cuoco, Hua He, ...
-
What Happens When You Regulate Risk? Evidence from a Simple Equilibrium Model
-
Equilibrium Impact of Value-at-Risk Regulation
By Markus Leippold, Paolo Vanini, ...
-
Nested Simulation in Portfolio Risk Measurement
By Michael B. Gordy and Sandeep Juneja
-
Mean-Variance Portfolio Allocation with a Value at Risk Constraint