Short-horizon regulation for long-term investors

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)3227-3238
JournalJournal of Banking and Finance
Volume36
Issue number12
DOIs
Publication statusPublished - 2012

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Investors
Expected shortfall
Value at risk
Wealth distribution
Economic cost
Wealth
Optimal portfolio
Pension plans
Costs

Cite this

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title = "Short-horizon regulation for long-term investors",
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.",
author = "Z. Shi and B.J.M. Werker",
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}

Short-horizon regulation for long-term investors. / Shi, Z.; Werker, B.J.M.

In: Journal of Banking and Finance, Vol. 36, No. 12, 2012, p. 3227-3238.

Research output: Contribution to journalArticleScientificpeer-review

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AB - 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.

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