This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Using Value-at-Risk to Control Risk Taking: How Wrong Can you Be?

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Xiongwei Ju (University of Illinois at Urbana-Champaign)
Neil D. Pearson (University of Illinois at Urbana-Champaign)

Additional information is available for the following registered author(s):

Abstract

We study a source of bias in value-at-risk estimates that has not previously been recognized. Because value-at-risk estimates are based on past data, a trader will often have a good understanding of the errors in the value-at-risk estimate, and it will be possible for her to choose portfolios for which she knows that the value -at-risk is less than the "true" value at risk. Thus, The trader will be able to take on more market risk than risk limits based on value-at-risk permit. Biases can also arise if she doesn't have a good understanding of the errors, but uses the estimated covariance matrix to achieve certain portfolio objectives. We assess the magnitude of these biases for three different assumptions about the motivations and behavoir of the trader and find that in all cases, value-at-risk estimates are systematically downward biased. In some circumstances the biases can be very large. Our study of the distributions of the biases also suggests a way to adjust the estimates to "correct" the biases.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://129.3.20.41/eps/fin/papers/9810/9810002.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by EconWPA in its series Finance with number 9810002.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 31 pages
Date of creation: 08 Oct 1998
Date of revision:
Handle: RePEc:wpa:wuwpfi:9810002

Note: Type of Document - PDF; prepared on pc; to print on HP; pages: 31; figures: included. Office for Futures and Options Research (OFOR)at University of Illinois at Ubana -Champaign. Working Paper 98-08. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
Contact details of provider:
Web page: http://129.3.20.41

For technical questions regarding this item, or to correct its listing, contact: (EconWPA).

Related research
Keywords: Value-at-Risk;

Other versions of this item:

Find related papers by JEL classification:
G - Financial Economics

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Linsmeier, Thomas J. & Pearson, Neil D., 1996. "Risk measurement: an introduction to value at risk," ACE Reports 14796, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics. [Downloadable!]
  2. Jose A. Lopez, 1997. "Regulatory evaluation of value-at-risk models," Research Paper 9710, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  3. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69. [Downloadable!]
  4. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 334-362.
  5. Jon Danielsson, 1997. "Extreme Returns, Tail Estimation, and Value-at-Risk," FMG Discussion Papers dp273, Financial Markets Group. [Downloadable!] (restricted)
  6. Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, EconWPA. [Downloadable!]
  7. J. S. Butler & Barry Schachter, 1996. "Improving Value-At-Risk Estimates By Combining Kernel Estimation With Historical Simulation," Finance 9605001, EconWPA. [Downloadable!]
  8. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philippe Jorion, 2005. "Bank Trading Risk and Systemic Risk," NBER Working Papers 11037, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Cornelis A. Los, 2004. "Why VAR Fails: Long Memory and Extreme Events in Financial Markets," Finance 0412014, EconWPA. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? IDEAS is not the only service displaying RePEc data. Choose on RePEc which service fits your needs best.

This page was last updated on 2009-11-17.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.