Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices

36 Pages Posted: 7 Nov 2008

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Alex Shapiro

New York University (NYU) - Department of Finance

Multiple version iconThere are 3 versions of this paper

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

Basak, Suleyman and Shapiro, Alex, Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices (October 1999). NYU Working Paper No. FIN-99-032, Available at SSRN: https://ssrn.com/abstract=1297118

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alex Shapiro

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0362 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~ashapiro/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
432
Abstract Views
2,961
Rank
1,511
PlumX Metrics