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Short-horizon regulation for long-term investors

Zhen Shi and Bas J.M. Werker

Journal of Banking & Finance, 2012, vol. 36, issue 12, 3227-3238

Abstract: We study the effects of imposing repeated short-horizon regulatory constraints on long-term investors. We show that Value-at-Risk and Expected Shortfall constraints, when imposed dynamically, lead to similar optimal portfolios and wealth distributions. We also show that, in utility terms, the costs of imposing these constraints can be sizeable. For a 96% funded pension plan, both an annual Value-at-Risk constraint and an annual Expected Shortfall constraint can lead to an economic cost of about 2.5–3.8% of initial wealth over a 15-year horizon.

Keywords: Portfolio choice; Value-at-Risk; Expected Shortfall; Pension funds (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3227-3238