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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26963

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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