VAR Risk Measures Versus Traditional Risk Measures: An Analysis and Survey
Journal of Risk, Vol. 4, Issue 3, pp. 1-27, 2002
34 Pages Posted: 1 Apr 2002 Last revised: 29 Sep 2013
Date Written: December 1, 2001
The article presents an analysis and partial survey regarding the validity of VaR risk measures in comparison to traditional risk measures. The assumed individuals are either maximizing their expected utility or possess a lexicographic utility function. The analysis is carried out for generally distributed functions and for the normal and the log-normal distributions. The main conclusion is that although VaR is an inadequate measure under the expected utility framework, it is at least as good as other traditional risk measures. Moreover, it can be improved by modified versions such as the Accumulated VaR (Mean-Shortfall).
Assuming a lexicographic expected utility adds justification to the use of AVaR as a legitimate risk measure that can be further applied in the newly proposed multi-VaR risk analysis.
Keywords: VaR, risk, risk measure, lexicographic, expected utility
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