On the Consistent Use of VaR in Portfolio Performance Evaluation: A Cautionary Note

25 Pages Posted: 23 Apr 2009 Last revised: 5 Jan 2010

Valeriy Zakamulin

University of Agder - School of Business and Law

Date Written: January 4, 2010

Abstract

The portfolio performance measures based on the Value-at-Risk (VaR) concept have gained widespread popularity and are often used in empirical studies. Unfortunately, we have noticed that in majority of empirical studies a VaR-based performance measure is used inconsistently. The goal of this paper is, therefore, to emphasize how to consistently use VaR in portfolio performance evaluation. We also elaborate on a simple framework that allows to derive a general formula for a portfolio performance measure which is not limited to the use of VaR-based reward and risk measures, but is valid for all reward and risk measures that satisfy a few plausible properties.

Keywords: performance measure, portfolio performance evaluation, risk measure, deviation measure, value-at-risk, conditional value-at-risk, expected shortfall, expected tail loss

JEL Classification: D81, G11

Suggested Citation

Zakamulin, Valeriy, On the Consistent Use of VaR in Portfolio Performance Evaluation: A Cautionary Note (January 4, 2010). Available at SSRN: https://ssrn.com/abstract=1393690 or http://dx.doi.org/10.2139/ssrn.1393690

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

Service Box 422
Kristiansand, N-4604
Norway
+47 38141039 (Phone)

HOME PAGE: http://vzakamulin.weebly.com/

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