Value-at-risk capital requirement regulation, risk taking and asset allocation: a mean–variance analysis

Guy Kaplanski, Haim Levy

Research output: Contribution to journalArticlepeer-review

8 Scopus citations


In this study, the mean–variance framework is employed to analyze the impact of the Basel value-at-risk (VaR) market risk regulation on the institution's optimal investment policy, the stockholders’ welfare, as well as the tendency of the institution to change the risk profile of the held portfolio. It is shown that with the VaR regulation, the institution faces a new regulated capital market line, which induces resource allocation distortion in the economy. Surprisingly, only when a riskless asset is available does VaR regulation induce the institution to reduce risk. Otherwise, the regulation may induce higher risk, accompanied by asset allocation distortion. On the positive side, the regulation implies an upper bound on the risk the institution takes and it never induces the firm to select an inefficient portfolio. Moreover, when the riskless asset is available, tightening the regulation always increases the amount of maintained eligible capital and decreases risk.

Original languageEnglish
Pages (from-to)215-241
Number of pages27
JournalEuropean Journal of Finance
Issue number3
StatePublished - 19 Feb 2015

Bibliographical note

Funding Information:
We are grateful to two anonymous Referees and the Associate Editor for their helpful suggestions that helped improved the paper. We acknowledge financial support from the Krueger Center of Finance.

Publisher Copyright:
© 2013 Taylor & Francis.


  • Basel regulations
  • capital requirement regulation
  • regulated capital market line
  • risk management
  • value-at-risk


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