Economic Costs and Benefits of Imposing Short-Horizon Value-at-Risk Type Regulation

44 Pages Posted: 25 Mar 2010 Last revised: 14 Jan 2012

See all articles by Zhen Shi

Zhen Shi

University of Melbourne; Financial Research Network (FIRN)

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 3, 2011


Regulators often set value-at-risk (VaR) constraints to limit the portfolio risk of institutional investors. For some investors, notably pension funds, the VaR constraint is enforced over a horizon which is significantly shorter than the investment horizon of the investor. Our paper aims to investigate the economic costs and benefits of this kind of regulation. Shorter regulatory constraint, on one hand, enables an institutional investor, like a pension fund, to avoid large losses when the investment environment worsens but, on the other hand, also limits the institutional investor's ability to benefit from an increase in stock prices. We show that the cost introduced by the short-term VaR constraints might over weight the benefits brought by such constraints.

Keywords: Portfolio choice, value-at-risk, pension funds

JEL Classification: G11, G23

Suggested Citation

Shi, Zhen and Werker, Bas J.M., Economic Costs and Benefits of Imposing Short-Horizon Value-at-Risk Type Regulation (March 3, 2011). Netspar Discussion Paper No. 12/2009-054, Available at SSRN: or

Zhen Shi

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
0061 3 9035 8173 (Phone)
0061 3 8344 6914 (Fax)


Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Bas J.M. Werker (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics