On the Consistent Use of VaR in Portfolio Performance Evaluation: A Cautionary Note

Abstract

The portfolio performance measures based on the Value at Risk (VaR) concept have gained widespread popularity and are often used in empirical studies. In the majority of empirical studies, however, a VaR-based performance measure is inconsistently used. In this article, Zakamouline emphasizes how to consistently use VaR in portfolio performance evaluation. He also elaborates on a simple framework that allows the derivation of a general formula for a portfolio performance measure that is not limited to the use of VaR-based reward and risk measures, but is valid for all reward and risk measures that satisfy a few plausible properties.