Economic implications of using a mean-VaR model for portfolio selection: A comparison with mean-variance analysis

Gordon J. Alexander, Alexandre M. Baptista

Research output: Contribution to journalArticlepeer-review

173 Scopus citations

Abstract

We relate value at risk (VaR) to mean-variance analysis and examine the economic implications of using a mean-VaR model for portfolio selection. When comparing two mean-variance efficient portfolios, the higher variance portfolio might have less VaR. Consequently, an efficient portfolio that globally minimizes VaR may not exist. Surprisingly, we show that it is plausible for certain risk-averse agents to end up selecting portfolios with larger standard deviations if they switch from using variance to VaR as a measure of risk. Therefore, regulators should be aware that VaR is not an unqualified improvement over variance as a measure of risk.

Original languageEnglish (US)
Pages (from-to)1159-1193
Number of pages35
JournalJournal of Economic Dynamics and Control
Volume26
Issue number7-8
DOIs
StatePublished - Mar 20 2002

Keywords

  • Asset pricing
  • Portfolio choice
  • Risk management and control
  • VaR

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