VAR risk measures vs traditional risk measures: an analysis and survey

Guy Kaplanski, Yoram Kroll

Abstract

ABSTRACT

The article presents an analysis and survey of the validity of VAR risk measures in comparison to traditional risk measures. Individuals are assumed to either maximize their expected utility or possess a lexicographic utility function. The analysis is carried out for generally distributed functions and for the normal and lognormal distributions. The main conclusion is that although VAR is an inadequate measure within the expected utility framework, it is at least as good as other traditional risk measures. Moreover, it can be improved by modified versions such as the accumulate VAR (mean shortfall). Assuming a lexicographic expected utility strengthens the argument for using AVAR as a legitimate risk measure, especially in the case of a regulated firm.