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The Implications of VaR and Short-Selling Restrictions on the Portfolio Manager Performance

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  • Fulbert, Tchana Tchana
  • Georges, Tsafack

Abstract

The 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43797.

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Date of creation: 17 May 2013
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Handle: RePEc:pra:mprapa:43797

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Keywords: Performance valuation; Asymmetric information; Financial regulation; VaR restriction; Short-Selling restriction;

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  1. Gordon J. Alexander & Alexandre M. Baptista, 2004. "A Comparison of VaR and CVaR Constraints on Portfolio Selection with the Mean-Variance Model," Management Science, INFORMS, INFORMS, vol. 50(9), pages 1261-1273, September.
  2. Jeremy Berkowitz & James O'Brien, 2002. "How Accurate Are Value-at-Risk Models at Commercial Banks?," Journal of Finance, American Finance Association, American Finance Association, vol. 57(3), pages 1093-1111, 06.
  3. Alexander, Gordon J. & Baptista, Alexandre M., 2006. "Does the Basle Capital Accord reduce bank fragility? An assessment of the value-at-risk approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1631-1660, October.
  4. Yiu, K. F. C., 2004. "Optimal portfolios under a value-at-risk constraint," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(7), pages 1317-1334, April.
  5. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 54(3), pages 363-406, July.
  6. Domenico Cuoco & Hua He & Sergei Issaenko, 2001. "Optimal Dynamic rading Strategies with Risk Limits," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp60, International Center for Financial Asset Management and Engineering.
  7. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, American Finance Association, vol. 34(1), pages 53-68, March.
  8. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2007. "Mean-variance portfolio selection with `at-risk' constraints and discrete distributions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(12), pages 3761-3781, December.
  9. Gendron, Michel & Genest, Christian, 1990. " Performance Measurement under Asymmetric Information and Investment Constraints," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1655-61, December.
  10. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, American Finance Association, vol. 23(2), pages 389-416, 05.
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