A Note on the Use of Modified Value-at-Risk

Abstract

While modified value-at-risk (or Cornish–Fisher value-atrisk) has been quite extensively used by practitioners and academics since its introduction, the authors show that it can be consistently used only over a limited interval of confidence levels. Confidence levels below 95.84% should never be used if one wishes to be consistent with investors’ preferences for kurtosis. In addition, the use of higher confidence levels is restricted by the value of the skewness. Failure to respect these restrictions on confidence levels results in misassessing risk and potentially overweighting assets that exhibit undesirable properties in terms of higher moments.