Time-inconsistency of VaR and time-consistent alternatives
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.
If you experience problems downloading a file, check if you have the proper application to view it first. 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Suleyman Basak & Alex Shapiro, .
"Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices,"
Rodney L. White Center for Financial Research Working Papers
6-99, Wharton School Rodney L. White Center for Financial Research.
- Basak, Suleyman & Shapiro, Alexander, 2001. "Value-at-Risk-Based Risk Management: Optimal Policies and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 371-405.
- Suleyman Basak & Alexander Shapiro, 1999. "Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-032, New York University, Leonard N. Stern School of Business-.
- Suleyman Basak & Alex Shapiro, . "Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices," Rodney L. White Center for Financial Research Working Papers 06-99, Wharton School Rodney L. White Center for Financial Research.
- Frank Riedel, 2003.
"Dynamic Coherent Risk Measures,"
03004, Stanford University, Department of Economics.
- Winker, Peter & Maringer, Dietmar, 2004. "The Hidden Risks of Optimizing Bond Portfolios under VaR," Research Notes 13, Deutsche Bank Research.
- Epstein, Larry G. & Schneider, Martin, 2003.
Journal of Economic Theory,
Elsevier, vol. 113(1), pages 1-31, November.
- David M Kreps & Evan L Porteus, 1978.
"Temporal Resolution of Uncertainty and Dynamic Choice Theory,"
Levine's Working Paper Archive
625018000000000009, David K. Levine.
- Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
- Leippold, Markus & Trojani, Fabio & Vanini, Paolo, 2006. "Equilibrium impact of value-at-risk regulation," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1277-1313, August.
- Wang, Tan, 2003. "Conditional preferences and updating," Journal of Economic Theory, Elsevier, vol. 108(2), pages 286-321, February.
- Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
- Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
- Stefan Weber, 2006. "Distribution-Invariant Risk Measures, Information, And Dynamic Consistency," Mathematical Finance, Wiley Blackwell, vol. 16(2), pages 419-441.
- Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006.
"Dynamic Variational Preferences,"
Carlo Alberto Notebooks
1, Collegio Carlo Alberto.
- Kai Detlefsen & Giacomo Scandolo, 2005. "Conditional and Dynamic Convex Risk Measures," SFB 649 Discussion Papers SFB649DP2005-006, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Kai Detlefsen & Giacomo Scandolo, 2005. "Conditional and dynamic convex risk measures," Finance and Stochastics, Springer, vol. 9(4), pages 539-561, October.
- 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, vol. 50(9), pages 1261-1273, September.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Sandro Merino & Mark Nyfeler, 2004. "Applying importance sampling for estimating coherent credit risk contributions," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 199-207.
- Arjan Berkelaar & Phornchanok Cumperayot & Roy Kouwenberg, 2002. "The Effect of VaR Based Risk Management on Asset Prices and the Volatility Smile," European Financial Management, European Financial Management Association, vol. 8(2), pages 139-164.
When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:40-46. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.