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Sub-additivity Re-examined: The case for Value-at-Risk

by Jón Daníelsson of the London School of Economics,
Bjørn N. Jorgensen of the Columbia Business School,
Gennady Samorodnitsky of Cornell University
Mandira Sarma of Eindhoven University of Technology, and
Casper G. de Vries of Erasmus University

November 2005

Abstract: This paper explores the potential for violations of VaR subadditivity both theoretically and by simulations, and finds that for most practical applications VaR is subadditive. Hence, there is no reason to choose a more complicated risk measure than VaR, solely for reasons of subadditivity.

JEL Classification: G00, G18.

Keywords: Value-at-Risk, subadditivity, regular variation, tail index, heavy tailed distribution.

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