The Implications of VaR and Short-Selling Restrictions on the Portfolio Manager Performance

Fulbert, Tchana Tchana and Georges, Tsafack (2013): The Implications of VaR and Short-Selling Restrictions on the Portfolio Manager Performance.

Abstract

The ability of a portfolio manager to deliver higher returns with relatively low risk is a fundamental issue in finance. We analyze here the performance of a portfolio manager under two different types of constraints. For a manager with private information, we compare the effect of value at risk (VaR) and short-selling constraints on the relation between the expected portfolio return and the market return. We find that in more volatile market, the VaR restriction will have a stronger effect on the manager performance compared to the short-selling restriction effect. The VaR constraint also strongly affects a manager with good quality of information while the short-selling restriction moderately affects manager with any level of information quality. For the manager attitude toward the risk, a too aggressive manager will find his overall performance more affected by the VaR constraint. Therefore, financial institutions such as large investment banks and hedge-funds with a strong ability to obtain superior information could be more affected by a very strong VaR restriction than by a short-selling restriction.

• Item Type: MPRA Paper
• Language: English
• Keywords: Performance valuation, Asymmetric information, Financial regulation, VaR restriction, Short-Selling restriction
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Admati, A. R. and S. A. Ross (1985),"Measuring Investment Performance in a Rational Expectations Equilibrium Model", Journal of Business 58, 1-26

Alexander, G. J., and A. M. Baptista (2004), "A Comparison of VaR and CVaR Constraints on Portfolio Selection with the Mean-Variance Model", Management Science 50, 1261--1273.

Alexander, G. J., and A. M. Baptista (2006), "Does the Basle Capital Accord Reduce Bank Fragility? As Assessment of the Value-at-Risk Approach", Journal of Monetary Economics, 53:1631-1660.

Alexander, G. J., A. M. Baptista, and S. Yan (2007), "Mean-Variance Portfolio Selection with 'at-Risk' Constraints and Discrete Distributions", Journal of Banking and Finance 31, 3761--3781.

Basak, S., and A. Shapiro (2001), "Value-at-Risk-Based Risk Management: Optimal Policies and Asset Prices", Review of Financial Studies, 14(2):371-405.

Berkowitz, J. and J. O'Brien (2002), "How Accurate are Value-at-Risk Models at Commercial Banks", Journal of Finance, 57, 1093-1112.

Brennan, M. (1979), "The Pricing of Contingent Claims in Discrete Time Models", Journal of Finance, 34, 53-68.

Cuoco, D., H. He, and S. Isaenko (2008), "Optimal Dynamic Trading Strategies with Risk Limits", Operations Research, 56(2), 358-368.

Davies, H. , and D. Green (2008), "Global Financial Regulation : the Essential Guide", Polity

Duffie, D. and J. Pan (1997) "An overview of value at risk" Journal of Derivatives, 4, 7-49.

Gendron, M. (1988), "A Note on Performance Measurement in Differential Information Framework", Canadian Journal of Administrative Sciences, 5, 56-63

Gendron, M., and C. Genest (1990), "Performance Measurement under Asymmetric Information and Investment Constraints", Journal of Finance 45, 1655-1661

IOSCO (2009), "Regulation of Short Selling: Final Report", June 2009, Secretary General IOSCO, Madrid, Spain.

Jensen M. C. (1968), "The Performance of Mutual Funds in the Period 1945-1964", Journal of Finance, .23, 389-419.

Jorion, P. (2000), "Value at Risk : The new Benchmark for Managing Financial Risk", 2nd Edition, McGraw-Hill, New York.

Jorion, P. (2002), "How Informative Are Value-at-Risk Disclosures?", Accounting Review, 4:911-931.

Merton, R. C. (1981), "On Market Timing and Investment Performance I: An Equilibrium theory of Value for Market Forecasts", Journal of Business 54, 363-406.

Pfleiderer, P. and S. Bhattacharya (1983), "A note on Performance Evaluation", Technical Report No. 714, GSB, Stanford University

Sharpe W. F. (1966), "Mutual Fund Performance", Journal of Business, 39, 119-138.

Treynor J. L. (1965), "How to Rate Management of Investment Funds", Harvard Business Review, 43, 63-75.

Treynor J. L. and K. Mazuy (1966), "Can Mutual Funds Outguess the Market?", Harvard Business Review, 44, 131-136.

Yiu K. F. C. (2004), "Optimal Portfolios under a Value-at-Risk Constraint", Journal of Economic Dynamics and Control, 28, 1317-1334.