Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices
This paper analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using a given risk-management model. We focus on the industry standard, the Value-at-Risk (VaR) based risk management, and find that VaR risk managers often optimally choose a larger exposure to risky assets than non risk managers, and consequently incur larger losses, when losses occur. We suggest an alternative risk management model, based on the expectation of a loss, to remedy the shortcomings of VaR. A general-equilibrium analysis reveals that the presence of VaR risk managers in a pure-exchange economy amplifies the stock-market volatility at times of down markets (and low output) and attenuates the volatility at times of up markets.
|Date of creation:||Oct 1999|
|Date of revision:|
|Contact details of provider:|| Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126|
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
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