The Implications of VaR and Short-Selling Restrictions on the Portfolio Manager Performance
AbstractThe ability of a portfolio manager to deliver higher returns with relatively low risk is a fundamental issue in finance. We analyze here the performance of a portfolio manager under two different types of constraints. For a manager with private information, we compare the effect of value at risk (VaR) and short-selling constraints on the relation between the expected portfolio return and the market return. We find that in more volatile market, the VaR restriction will have a stronger effect on the manager performance compared to the short-selling restriction effect. The VaR constraint also strongly affects a manager with good quality of information while the short-selling restriction moderately affects manager with any level of information quality. For the manager attitude toward the risk, a too aggressive manager will find his overall performance more affected by the VaR constraint. Therefore, financial institutions such as large investment banks and hedge-funds with a strong ability to obtain superior information could be more affected by a very strong VaR restriction than by a short-selling restriction.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 43797.
Date of creation: 17 May 2013
Date of revision:
Performance valuation; Asymmetric information; Financial regulation; VaR restriction; Short-Selling restriction;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-26 (All new papers)
- NEP-CTA-2013-01-26 (Contract Theory & Applications)
- NEP-RMG-2013-01-26 (Risk Management)
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