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Time-inconsistency of VaR and time-consistent alternatives

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  • Cheridito, Patrick
  • Stadje, Mitja

Abstract

We show that VaR (Value-at-Risk) is not time-consistent and discuss examples where this can lead to dynamically inconsistent behavior. Then we propose two time-consistent alternatives to VaR. The first one is a composition of one-period VaR's. It is time-consistent but not coherent. The second one is a composition of average VaR's. It is a time-consistent coherent risk measure.

Suggested Citation

  • Cheridito, Patrick & Stadje, Mitja, 2009. "Time-inconsistency of VaR and time-consistent alternatives," Finance Research Letters, Elsevier, vol. 6(1), pages 40-46, March.
    • Handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:40-46
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