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

Author

Listed:
  • Zhen Shi

    (University of Melbourne, and Netspar)

  • Bas J.M. Werker

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

Abstract

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.

Suggested Citation

  • Zhen Shi & Bas J.M. Werker, 2011. "Economic Costs and Benefits of Imposing Short-Horizon Value-at-Risk Type Regulation," Tinbergen Institute Discussion Papers 11-053/2/DSF17, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20110053
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    References listed on IDEAS

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    More about this item

    Keywords

    Portfolio Choice; Value-at-Risk; Pension Funds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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