VaR Limits for Pension Funds: An Evaluation

Berstein, Solange and Chumacero, Rómulo (2010): VaR Limits for Pension Funds: An Evaluation.

Abstract

This paper evaluates the effects of imposing Value-at-Risk (VaR) limits and quantitative restrictions on portfolio choices in the context of a risk-based supervision framework for defined contribution pension funds. It shows the conditions under which VaR constraints are equivalent to constraints on volatility. The paper also presents some further considerations that regulators should take into account when adopting a risk-based supervision framework when contributions are mandatory and a significant part of the pension depends on the performance of past investments.

• Item Type: MPRA Paper
• Language: English
• Keywords: Portfolio Choice; VaR
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation

References

Alexander, G. and A. Baptista (2002). “Economic Implications of Using a Mean-VaR Model for Portfolio Selection: A Comparison with Mean-Variance Analysis,” Journal of Economic Dynamics & Control 26, 1159-93.

Basak, S. and A. Shapiro (2001). “Value-at-Risk Based Risk Management: Optimal Policies and Asset Prices,” Reviews of Financial Studies 14, 371-401.

Berstein, S. and R. Chumacero (2006). “Quantifying the Costs of Investment Limits for Chilean Pension Funds,” Fiscal Studies 27, 99-123.

Campbell, J., A. Lo, and C. MacKinlay (1997). The Econometrics of Financial Markets. Princeton University Press.

De Giorgi, E. (2002). “A Note on Portfolio Selection under Various Risk Measures,” Manuscript, University of Zurich.

Dowd, K. (1998). Beyond Value at Risk: The New Science of Risk Management. Wiley & Sons.

Gourieroux, C., J. Laurent, and O. Scaillet (2000). “Sensitivity Analysis of Values at Risk,” Journal of Empirical Finance 7, 225-45.

Guidolin, M. and A. Timmermann (2006). “Term Structure of Risk under Alternative Econometric Specifications,” Journal of Econometrics 131, 285-308.

Huang, C. and R. Litzenberger (1988). Foundations for Financial Economics. Prentice Hall.

LeRoy, S. and J. Werner (2001). Principles of Financial Economics. Cambridge University Press.

Rockafellar, T. and S. Uryasev (2000). “Optimization of Conditional Value-at-Risk,” Journal of Risk 2, 21-41.