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The Implications of VaR and Short-Selling Restrictions on the Portfolio Manager Performance

Author

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  • Fulbert, Tchana Tchana
  • Georges, Tsafack

Abstract

The ability of a portfolio manager to deliver higher returns with relatively low risk is a fundamental issue in finance. We analyze here the performance of a portfolio manager under two different types of constraints. For a manager with private information, we compare the effect of value at risk (VaR) and short-selling constraints on the relation between the expected portfolio return and the market return. We find that in more volatile market, the VaR restriction will have a stronger effect on the manager performance compared to the short-selling restriction effect. The VaR constraint also strongly affects a manager with good quality of information while the short-selling restriction moderately affects manager with any level of information quality. For the manager attitude toward the risk, a too aggressive manager will find his overall performance more affected by the VaR constraint. Therefore, financial institutions such as large investment banks and hedge-funds with a strong ability to obtain superior information could be more affected by a very strong VaR restriction than by a short-selling restriction.

Suggested Citation

  • Fulbert, Tchana Tchana & Georges, Tsafack, 2013. "The Implications of VaR and Short-Selling Restrictions on the Portfolio Manager Performance," MPRA Paper 43797, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:43797
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    File URL: https://mpra.ub.uni-muenchen.de/43797/1/MPRA_paper_43797.pdf
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    References listed on IDEAS

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    1. 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.
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    More about this item

    Keywords

    Performance valuation; Asymmetric information; Financial regulation; VaR restriction; Short-Selling restriction;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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