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Time-inconsistency of VaR and time-consistent alternatives

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  • Cheridito, Patrick
  • Stadje, Mitja

Abstract

We show that VaR (Value-at-Risk) is not time-consistent and discuss examples where this can lead to dynamically inconsistent behavior. Then we propose two time-consistent alternatives to VaR. The first one is a composition of one-period VaR's. It is time-consistent but not coherent. The second one is a composition of average VaR's. It is a time-consistent coherent risk measure.

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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 6 (2009)
Issue (Month): 1 (March)
Pages: 40-46

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Handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:40-46

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Web page: http://www.elsevier.com/locate/frl

Related research

Keywords: Value-at-Risk Time-consistency Composed Value-at-Risk Composed average Value-at-Risk;

References

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Cited by:
  1. Zachary Feinstein & Birgit Rudloff, 2012. "Time consistency of dynamic risk measures in markets with transaction costs," Papers 1201.1483, arXiv.org, revised Dec 2012.
  2. Daniel, Engelage, 2011. "Optimal stopping with dynamic variational preferences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 2042-2074, September.
  3. Zachary Feinstein & Birgit Rudloff, 2012. "Multi-portfolio time consistency for set-valued convex and coherent risk measures," Papers 1212.5563, arXiv.org, revised May 2014.

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