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Economic Costs and Benefits of Imposing Short-Horizon Value-at-Risk Type Regulation


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  • Zhen Shi

    (University of Melbourne, and Netspar)

  • Bas J.M. Werker

    (CentER, Tilburg University, Duisenberg School of Finance, and Netspar)

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    Regulators often set value-at-risk (VaR) constraints to limit the portfolio risk of institutional investors. For some investors, notably pension funds, the VaR constraint is enforced over a horizon which is significantly shorter than the investment horizon of the investor. Our paper aims to investigate the economic costs and benefits of this kind of regulation. Shorter regulatory constraint, on one hand, enables an institutional investor, like a pension fund, to avoid large losses when the investment environment worsens but, on the other hand, also limits the institutionalinvestor's ability to benefit from an increase in stock prices. We show that the cost introduced by the short-term VaR constraints might over weight the benefitsbrought by such constraints.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-053/2/DSF17.

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    Date of creation: 17 Mar 2011
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    Handle: RePEc:dgr:uvatin:20110053

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    Related research

    Keywords: Portfolio Choice; Value-at-Risk; Pension Funds;

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