Portfolio management with dynamic risk limits

The financial crisis highlighted the role of regulation in controlling the risks the financial institutions are exposed to. How to impose risk limits, such as VaR, on practitioners to successfully prevent them from incurring large losses in extreme events is a big issue. In this thesis, we analyze the cases where risk limits are imposed not only at the initial time but also at an intermediate time and find that both dynamic VaR constraints and dynamic LEL constraints reduce portfolio managers‘ inclinations to bear excessive risks in extremes and outperform their static counterparts in terms of risk control. Also, dynamic LEL constraints do a better job than dynamic VaR constraints in reducing risk exposure in the terminal period.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.


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