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The Strategic Uses of Value at Risk

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  • William Panning

Abstract

In contrast to alternative measures of risk, value at risk (VaR) has important virtues–intelligibility, comparability, and practicality–that make it a potentially valuable tool for strategic decision making and capital management in a wide variety of industries. However, capital-management decisions in most industries–including financial services, such as property/casualty insurance–have time horizons far longer than the one-day horizon that prevails in commercial and investment banking, where the use of VaR is now concentrated. For VaR to be usefully applied to longhorizon decisions, it must address three fundamental problems unique to that context: estimation risk, adaptive risk modification, and franchise risk. This paper describes each of these problems, shows how they can be solved, and provides examples applicable to property/casualty insurance.

Suggested Citation

  • William Panning, 1999. "The Strategic Uses of Value at Risk," North American Actuarial Journal, Taylor & Francis Journals, vol. 3(2), pages 84-105.
    • Handle: RePEc:taf:uaajxx:v:3:y:1999:i:2:p:84-105
    DOI: 10.1080/10920277.1999.10595803
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    Cited by:

    1. Bagher Adabi & Mohsen Mehrara & Shapour Mohammadi, 2015. "Evaluation Approaches of Value at Risk for Tehran Stock Exchange," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 19(1), pages 41-62, Winter.
    2. Kevin Dowd & David Blake & Andrew Cairns, 2004. "Long‐Term Value at Risk," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 5(2), pages 52-57, February.
    3. Tokat, Yesim & Rachev, Svetlozar T. & Schwartz, Eduardo S., 2003. "The stable non-Gaussian asset allocation: a comparison with the classical Gaussian approach," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 937-969, April.
    4. Durán Santomil, Pablo & Otero González, Luís & Martorell Cunill, Onofre & Merigó Lindahl, José M., 2018. "Backtesting an equity risk model under Solvency II," Journal of Business Research, Elsevier, vol. 89(C), pages 216-222.
    5. Andrew Cairns & Kevin Dowd, 2003. "(UBS Pensions series 17) Long-Term Value at Risk," FMG Discussion Papers dp468, Financial Markets Group.
    6. Tokat, Yesim & Rachev, Svetlozar T. & Schwartz, Eduardo, 2000. "The Stable non-Gaussian Asset Allocation: A Comparison with the Classical Gaussian Approach," University of California at Santa Barbara, Economics Working Paper Series qt9ph6b5gp, Department of Economics, UC Santa Barbara.

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