VaR at Its Extremes: Impossibilities and Conditions for One-Sided Random Variables

TL;DR

This paper explores the extremal aggregation behavior of Value-at-Risk (VaR) for sums of one-sided random variables, revealing conditions under which VaR is additive, super-additive, or impossible to be sub-additive.

Contribution

It introduces structural conditions—negative simplex dependence and simplex dominance—that characterize when VaR exhibits super-additivity or additivity, extending to various dependence structures.

Findings

VaR sub-additivity is impossible except in degenerate cases.

Conditions for VaR super-additivity are characterized by NSD and SD.

Results apply to variables with arbitrary finite endpoints and diverse dependence structures.

Abstract

We investigate the extremal aggregation behavior of Value-at-Risk (VaR) -- that is, its additivity properties across all probability levels -- for sums of one-sided random variables. For risks supported on \([0,\infty)\), we show that VaR sub-additivity is impossible except in the degenerate case of exact additivity, which holds only under co-monotonicity. To characterize when VaR is instead fully super-additive, we introduce two structural conditions: negative simplex dependence (NSD) for the joint distribution and simplex dominance (SD) for a margin-dependent functional. Together, these conditions provide a unified and easily verifiable framework that accommodates non-identical margins, heavy-tailed laws, and a wide spectrum of negative dependence structures. All results extend to random variables with arbitrary finite lower or upper endpoints, yielding sharp constraints on when strict sub- or super-additivity can occur.