Special Issue: Proceedings of the Columbia — Ecole Polytechnique Workshop on New Directions in Quantitative Finance; Paris, 2008No Access
THE VAR AT RISK
https://doi.org/10.1142/S0219024910005875Cited by:8 (Source: Crossref)
Abstract
I show that the structure of the firm is not neutral with respect to regulatory capital budgeted under rules which are based on the Value-at-Risk. Indeed, when a holding company has the liberty to divide its risk into as many subsidiaries as needed, and when the subsidiaries are subject to capital requirements according to the Value-at-Risk budgeting rule, then there is an optimal way to divide risk which is such that the total amount of capital to be budgeted by the shareholder is zero. This result may lead to regulatory arbitrage by some firms.
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