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Time-inconsistency of VaR and time-consistent alternatives

  • Cheridito, Patrick
  • Stadje, Mitja

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.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 6 (2009)
Issue (Month): 1 (March)
Pages: 40-46

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Handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:40-46
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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