Documento de Trabajo Nº 26: VaR Limits for Pension Funds: An Evaluation

A risk-based approach for supervision and regulation of the financial sector is gaining ground. Market risk is one of the components that regulators attempt to measure, monitor, and mitigate.

The VaR measure has been one of the possibilities that have been explored for this purpose. One of the most important sectors in which this practice has been adopted is the pension funds industry. For example, Mexico has adopted a regulation that combines quantitative limits and a Value-at-Risk (VaR) limit and some other countries are considering adopting a similar framework.

This paper evaluates the effects of VaR limits and quantitative restrictions on portfolio choices. The paper is organized as follows: Section 2 presents some equiv- alences between VaR limits and conventional risk measures. These equivalences are used to obtain some implications with respect to the effects of VaR limits. Section 3 uses Chilean data to exemplify these effects and discuss specific characteristics of VaR based supervision.1 Finally, Section 4 presents some recommendations.