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A model of delegation with a VaR constraint

Author

Listed:
  • Guo, Rui
  • Jiang, Ying
  • Li, Ao
  • Qiu, Zhigang
  • Wang, Hefei

Abstract

This paper proposes a model of delegated portfolio management, in which professional fund managers face a value-at-risk (VaR) constraint. We show that the existence of the VaR constraint impairs the optimal risk sharing in both the trading and delegation stages. As a result, the VaR constraint leads household investors to take excessive risk and may cause the prices of fundamentally uncorrelated assets to be correlated.

Suggested Citation

  • Guo, Rui & Jiang, Ying & Li, Ao & Qiu, Zhigang & Wang, Hefei, 2021. "A model of delegation with a VaR constraint," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317098
    DOI: 10.1016/j.frl.2020.101895
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    More about this item

    Keywords

    Delegated portfolio management; Contagion; VaR constraint;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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