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Mean-variance portfolio allocation with a value at risk constraint

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In this paper, I first provide a unifying approach to Mean-Variance analysis and Value at Risk, which highlights both their similarities and differences. Then I use it to explain how fund managers can take investment decisions within the well-known Mean-Variance allocation framework that satisfy the VaR restrictions imposed by regulators. I do so by introducing a new type of line to the usual mean-standard deviation diagram, called IsoVaR, which represents all the portfolios that share the same VaR for a fixed probability level. Finally, I analyse the shadow cost of a VaR constraint.

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en

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application/pdf

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http://eprints.lse.ac.uk/25058/1/dp380.pdf

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