Time-inconsistency of VaR and time-consistent alternatives

P. Cheridito; M.A. Stadje

doi:10.1016/j.frl.2008.10.002

Time-inconsistency of VaR and time-consistent alternatives

P. Cheridito, M.A. Stadje

Research output: Contribution to journal › Article › Academic › peer-review

49 Citations (Scopus)

Abstract

We show that VaR (Value-at-Risk) is not time-consistent and discuss examples where this can lead to dynamically inconsistent behavior. Then we propose two time-consistent alternatives to VaR. The first one is a composition of one-period VaR's. It is time-consistent but not coherent. The second one is a composition of average VaR's. It is a time-consistent coherent risk measure.

Original language	English
Pages (from-to)	40-46
Journal	Finance Research Letters
Volume	6
Issue number	1
DOIs	https://doi.org/10.1016/j.frl.2008.10.002
Publication status	Published - 2009

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10.1016/j.frl.2008.10.002

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abstract = "We show that VaR (Value-at-Risk) is not time-consistent and discuss examples where this can lead to dynamically inconsistent behavior. Then we propose two time-consistent alternatives to VaR. The first one is a composition of one-period VaR's. It is time-consistent but not coherent. The second one is a composition of average VaR's. It is a time-consistent coherent risk measure.",

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AB - We show that VaR (Value-at-Risk) is not time-consistent and discuss examples where this can lead to dynamically inconsistent behavior. Then we propose two time-consistent alternatives to VaR. The first one is a composition of one-period VaR's. It is time-consistent but not coherent. The second one is a composition of average VaR's. It is a time-consistent coherent risk measure.

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JO - Finance Research Letters

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Time-inconsistency of VaR and time-consistent alternatives

Abstract

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