On the (Ir)relevancy of value-at-risk regulation

The measurement and practical implementation of the Value-at-Risk (VaR) criterion is an active and exciting area of research, with numerous recent contributions. This research has almost exclusively been concerned with the accuracy of various estimation techniques and risk measures. Compared to the statistical approach, the financial economic analysis of VaR has been relatively neglected. Guthoff, Pfingsten and Wolf (1996) consider the ranking of projects and traditional performance criteria, while Kupiec and O’Brien (1997) and Steinherr (1998) discuss incentive compatible regulation schemes. The wider issue of the benefits for society of VaR based risk management and supervision has hardly been addressed, see however Danielsson, Jorgensen and de Vries (1999b) and Danielsson, Jorgensen and de Vries (1999a). They consider the implications of externally imposed VaR constraints, the public relevance of the VaR based management and regulation schemes, and incentives for quality improvement. This paper summarizes the public policy aspects of this broader line of reasoning.