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VaR, Probability-of-Ruin and Their Consequences for Normal or Lognormal Risks
Company: New Jersey Institute of Technology
Company Url: Click here to open
Year Of Publication: 2009
Month Of Publication: July
Pages: 32
Download Count: 11
View Count: 1678
Comment Num: 0
Language: English
Who Can Read: Free
Date: 5-18-2010
Publisher: Administrator
Summary
Despite the use of Var as a means to control risk, using VaR can have the opposite
effect. VaR is used by bank and insurance regulators more than any other risk measure. A
value-at-risk (Var) constraint on the probability that future firm equity value will be less than
a floor, when the floor is zero, is also a constraint on the probability of ruin. A manager who
maximizes his firm's expected equity value subject to a VaR constraint, when the
firm is in bad financial health, may pay a premium for financial instruments that
increase his firm's volatility and does the opposite when the firm is in good financial
healths, so it's use may increase banks' volatility in bad economic conditions. Hence
the use of VaR may increase the instability of the global banking network when the
banking system when it is more vulnerable. This paper examines the cases where
risks are multivariate normal or lognormal.
Author(s)
Eisenberg, Larry Sign in to follow this author
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