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

Posted: 17 May 2001

See all articles by Alex Shapiro

Alex Shapiro

New York University (NYU) - Department of Finance

Suleyman Basak

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

Multiple version iconThere are 3 versions of this paper

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.

Keywords: Risk Management, VaR, Portfolio Choice, Asset Pricing, Volatility

JEL Classification: G11, G12, C61, D51

Suggested Citation

Shapiro, Alex and Basak, Suleyman, Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices. Review of Financial Studies, Vol. 14, No. 2, pp. 371-405, Summer 2001. Available at SSRN: https://ssrn.com/abstract=264885

Alex Shapiro (Contact Author)

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/

Suleyman Basak

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

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,031
PlumX Metrics