A model of delegation with a VaR constraint

Rui Guo; Ying Jiang; Ao Li; Zhigang Qiu; Hefei Wang

doi:10.1016/j.frl.2020.101895

A model of delegation with a VaR constraint

Rui Guo, Ying Jiang, Ao Li, Zhigang Qiu^*, Hefei Wang

^*Corresponding author for this work

Renmin University of China

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

1 Citation (Scopus)

Abstract

This paper proposes a model of delegated portfolio management, in which professional fund managers face a value-at-risk (VaR) constraint. We show that the existence of the VaR constraint impairs the optimal risk sharing in both the trading and delegation stages. As a result, the VaR constraint leads household investors to take excessive risk and may cause the prices of fundamentally uncorrelated assets to be correlated.

Original language	English
Article number	101895
Journal	Finance Research Letters
Volume	42
DOIs	https://doi.org/10.1016/j.frl.2020.101895
Publication status	Published - Oct 2021
Externally published	Yes

Keywords

Contagion
Delegated portfolio management
VaR constraint

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10.1016/j.frl.2020.101895

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title = "A model of delegation with a VaR constraint",

abstract = "This paper proposes a model of delegated portfolio management, in which professional fund managers face a value-at-risk (VaR) constraint. We show that the existence of the VaR constraint impairs the optimal risk sharing in both the trading and delegation stages. As a result, the VaR constraint leads household investors to take excessive risk and may cause the prices of fundamentally uncorrelated assets to be correlated.",

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AU - Guo, Rui

AU - Jiang, Ying

AU - Li, Ao

AU - Qiu, Zhigang

AU - Wang, Hefei

PY - 2021/10

Y1 - 2021/10

N2 - This paper proposes a model of delegated portfolio management, in which professional fund managers face a value-at-risk (VaR) constraint. We show that the existence of the VaR constraint impairs the optimal risk sharing in both the trading and delegation stages. As a result, the VaR constraint leads household investors to take excessive risk and may cause the prices of fundamentally uncorrelated assets to be correlated.

AB - This paper proposes a model of delegated portfolio management, in which professional fund managers face a value-at-risk (VaR) constraint. We show that the existence of the VaR constraint impairs the optimal risk sharing in both the trading and delegation stages. As a result, the VaR constraint leads household investors to take excessive risk and may cause the prices of fundamentally uncorrelated assets to be correlated.

KW - Contagion

KW - Delegated portfolio management

KW - VaR constraint

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DO - 10.1016/j.frl.2020.101895

M3 - Article

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SN - 1544-6123

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JO - Finance Research Letters

JF - Finance Research Letters

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ER -

A model of delegation with a VaR constraint

Abstract

Keywords

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