A model of delegation with a VaR constraint

Rui Guo, Ying Jiang, Ao Li, Zhigang Qiu () and Hefei Wang

Finance Research Letters, 2021, vol. 42, issue C

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.

Keywords: Delegated portfolio management; Contagion; VaR constraint (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317098

DOI: 10.1016/j.frl.2020.101895

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