Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
Posted: 17 May 2001
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
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