In practice, risk-taking agents are mandated to build portfolios by primarily constraining the tails of portfolio returns to satisfy VaR, stress testing, or expected shortfall (CVaR) conditions.

Judged as of 2014-12-24. True: industry practice and regulations (e.g. Basel rules, UCITS, internal risk mandates) show that portfolio managers and traders are commonly required to keep tail-risk measures such as VaR, stress tests or expected shortfall within limits, and that these are primary constraints in building portfolios. Mostly true: such constraints are widespread, but 'primarily' overstates their role compared with other mandates (e.g. benchmarks, volatility). Mixed: tail constraints are common in some sectors (banks) and not in others (many asset managers). Mostly false: tail-risk limits exist but are secondary or rare as the main constraint on building portfolios. False: such mandates are not a common practice.

Set before the research began.

1. E1 10-788 Guidelines on risk measurement for publication Committee of European Securities Regulators (CESR), now ESMA · 28 July 2010

   “A UCITS must use an advanced risk measurement methodology (supported by a stress testing program) such as the Value-at-Risk (VaR) approach to calculate global exposure where:”

2. E2 Proving Incentives for Long-Term Investment by Pension Funds: The Use of Outcome-based Benchmarks (Policy Research Working Paper 6885) The World Bank · May 2014

   “Investment risk is generally controlled via limits on the amount of a portfolio which can be invested in certain assets.”

3. E3 Proving Incentives for Long-Term Investment by Pension Funds: The Use of Outcome-based Benchmarks (Policy Research Working Paper 6885) The World Bank · May 2014

   “In Mexico the use of a value at risk (VaR) maximum limit was tried for pension funds (though was abandoned in 2013).”

4. E4 Risk management | Norges Bank Investment Management Norges Bank Investment Management

   “The most important limit is expressed using the statistical concept of expected relative volatility, or tracking error.”

The evidence shows that UCITS rules require VaR-type methods with stress testing in certain circumstances [E1], that pension funds generally control risk through limits on asset holdings [E2], that Mexico tried a VaR limit for pension funds and dropped it in 2013 [E3], and that one fund manager's undated page names tracking error as its most important limit [E4]. None of the evidence covers banks or practice more broadly, so it cannot show whether tail constraints were mainly secondary or were common in some sectors and not others, as the criteria require.