Time-inconsistency of VaR and time-consistent alternatives

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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Year of publication:	2009
Authors:	Cheridito, Patrick ; Stadje, Mitja
Published in:	Finance Research Letters. - Elsevier, ISSN 1544-6123. - Vol. 6.2009, 1, p. 40-46
Publisher:	Elsevier
Keywords:	Value-at-Risk Time-consistency Composed Value-at-Risk Composed average Value-at-Risk

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005311398