Time-inconsistency of VaR and time-consistent alternatives
AbstractWe 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 InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 6 (2009)
Issue (Month): 1 (March)
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Web page: http://www.elsevier.com/locate/frl
Value-at-Risk Time-consistency Composed Value-at-Risk Composed average Value-at-Risk;
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