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

Preprint
Publisher Website
Google Scholar
    • preprint
      • Published in RePEc
Abstract
This paper analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using a given risk-management model. We focus on the industry standard, the Value-at-Risk (VaR) based risk management, and 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 in a pure-exchange economy amplifies the stock-market volatility at times of down markets (and low output) and attenuates the volatility at times of up markets. (This abstract was borrowed from another version of this item.)

This publication has 0 references indexed in Scilit: