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Value-at-risk-based risk management: optimal policies and asset prices
Authors:Basak  S; Shapiro  A
Institution:1 Institute of Finance and Accounting, London Business School, Regents Park, London NW1 4SA, UK
2 New York University, NY, USA
z Corresponding author
E-mail: sbasak@london.edu
Abstract:This article analyzes optimal, dynamic portfolio and wealth/consumptionpolicies of utility maximizing investors who must also managemarket-risk exposure using Value-at-Risk (VaR). We find thatVaR risk managers often optimally choose a larger exposure torisky assets than non-risk managers and consequently incur largerlosses when losses occur. We suggest an alternative risk-managementmodel, based on the expectation of a loss, to remedy the shortcomingsof VaR. A general-equilibrium analysis reveals that the presenceof VaR risk managers amplifies the stock-market volatility attimes of down markets and attenuates the volatility at timesof up markets.
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