Maxvar - Long Horizon Value at Risk in a Mark-to-Market Environment

Journal of Investment Management, Vol. 2, No. 3, Third Quarter 2004

Posted: 16 Sep 2004

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Richard Stanton

University of California, Berkeley - Haas School of Business

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

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Abstract

The standard VaR approach considers only terminal risk, completely ignoring the path of the portfolio value prior to this final horizon. This assumption is unrealistic-interim risk may be critical in a mark-to-market environment because interim values of a portfolio may generate margin calls and affect trading strategies. We provide a simple framework for adjusting standard VaR for interim risk. We introduce the notion of MaxVaR, which is analogous to VaR except that it considers the probability of seeing a given low cumulative return on or before the terminal date. Under the standard lognormality assumption and for reasonable parameterizations, MaxVaR may exceed VaR by over 40%. We show that adjusting VaR for interim mark-to-market risk is critically important for high Sharpe Ratio portfolios (e.g., for hedge funds).

JEL Classification: G00

Suggested Citation

Boudoukh, Jacob and Richardson, Matthew P. and Stanton, Richard H. and Whitelaw, Robert F., Maxvar - Long Horizon Value at Risk in a Mark-to-Market Environment. Journal of Investment Management, Vol. 2, No. 3, Third Quarter 2004. Available at SSRN: https://ssrn.com/abstract=568462

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Richard H. Stanton

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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