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Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26963
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| Title: | Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices |
| Authors: | Basak, Suleyman
Shapiro, Alexander |
| Keywords: | Risk Management
VaR
Portfolio Choice
Asset Pricing
Volatility |
| Issue Date: | Oct-1999 |
| Series/Report no.: | FIN-99-032 |
| Abstract: | 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. |
| URI: | http://hdl.handle.net/2451/26963 |
| Appears in Collections: | Finance Working Papers
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