Abstract
In recent financial literature the Incremental Value-at-Risk (IVaR), i.e., the incremental effect on VaR of adding a new instrument to the existing portfolio, has become a standard tool for making portfolio-hedging decisions. Since, calculating the exact IVaR value could be computationally very costly, approximate formulas have been developed. According to the most commonly used formula, IVaR is approximately equal to the current VaR multiplied by the beta coefficient of the candidate asset. A spontaneous question arises: could the beta sign be a qualitative indicator of a profitable (non-profitable) trade? Fallacy of this conjecture is proved. Even an elliptically distributed asset with a positive beta and variance greater than that of the existent portfolio may produce favourable effects on the overall VaR. These results seem to cast shadows on the above approximate formula reliability even for small changes in portfolio composition.
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© 2001 Springer Basel AG
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Tibiletti, L. (2001). Incremental Value-at-Risk: traps and misinter-pretations. In: Kohlmann, M., Tang, S. (eds) Mathematical Finance. Trends in Mathematics. Birkhäuser, Basel. https://doi.org/10.1007/978-3-0348-8291-0_34
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DOI: https://doi.org/10.1007/978-3-0348-8291-0_34
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