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

Fulbert Tchana Tchana and Tsafack Georges

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Performance valuation; Asymmetric information; Financial regulation; VaR restriction; Short-Selling restriction (search for similar items in EconPapers)
JEL-codes: G11 G28 G32 (search for similar items in EconPapers)
Date: 2013-05-17
New Economics Papers: this item is included in nep-cta and nep-rmg
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