 When more is less: Using multiple constraints to reduce tail riskGordon Alexander, Alexandre Baptista () and Shu Yan Journal of Banking & Finance, 2012, vol. 36, issue 10, 2693-2716 Abstract: Financial institutions suffered large trading losses during the 2007–2009 global financial crisis. These losses cast doubt on the effectiveness of regulations and risk management systems based on a single Value-at-Risk (VaR) constraint. While some researchers have recommended using Conditional Value-at-Risk (CVaR) to control tail risk, VaR remains popular among practitioners and regulators. Accordingly, our paper examines the effectiveness of multiple VaR constraints in controlling CVaR. Under certain conditions, we theoretically show that they are more effective than a single VaR constraint. Furthermore, we numerically find that the maximum CVaR permitted by the constraints is notably smaller than with a single constraint. These results suggest that regulations and risk management systems based on multiple VaR constraints are more effective in reducing tail risk than those based on a single VaR constraint. Keywords: G11; G21; G28; Financial crisis; Financial institutions; Tail risk; Regulation; Risk management (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:10:p:2693-2716 DOI: 10.1016/j.jbankfin.2011.08.002 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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