An Economic Evaluation of Model Risk in Long-term Asset Allocations

Christophe Boucher (), Gregory Jannin, Bertrand Maillet and Patrick Kouontchou ()
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Christophe Boucher: A.A.Advisors-QCG - ABN AMRO, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine
Patrick Kouontchou: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine

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Abstract: Following the recent crisis and the revealed weakness of risk management practices, regulators of developed markets have recommended that financial institutions assess model risk. Standard risk measures, such as the Value-at-Risk (VaR), emerged over recent decades as the industry standard for risk management and have today become a key tool for asset allocation. We illustrate and estimate model risk, and focus on the evaluation of its impact on optimal portfolios at various time horizons. Based on a long sample of U.S. data, we find a non-linear relation between VaR model errors and the horizon that impacts optimal asset allocations.

Keywords: Model Risk; VaR; Long-term Asset Allocation; Safety First Criterion.; risque de modèle; allocation d'actifs de long-terme; critère de prudence. (search for similar items in EconPapers)
Date: 2013-03-05
New Economics Papers: this item is included in nep-rmg
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00825303
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: An Economic Evaluation of Model Risk in Long-term Asset Allocations (2013)
Working Paper: An Economic Evaluation of Model Risk in Long-term Asset Allocations (2013)
Working Paper: An Economic Evaluation of Model Risk In Long-term Asset Allocations (2013)
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