VaR constrained asset pricing with relative performance

•We propose an asset pricing model in which the Value-at-Risk (VaR) constrained agents care about relative performance.•Concerns about relative performance lead less risk averse agent to take more risk.•The more risk averse agent is less likely to hit the VaR constraint with the relative performance.•Thus, relative performance improve the risk sharing in the financial market.•The volatility is less likely to jump which means relative performance makes the economy more stable.

This paper shows that when Value-at-Risk constrained institutional investors care about their relative standings among the peer group, more risk averse investors would take more risk, which improves the risk sharing and lowers the volatility.