Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
38 Pages Posted: 24 Mar 2000
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Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
Date Written: February 2001
Abstract
This article analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using Value-at-Risk (VaR). We 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 amplifies the stock-market volatility at times of down markets and attenuates the volatility at times of up markets.
JEL Classification: G12
Suggested Citation: Suggested Citation
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