The riskiness of stock versus money market investment with stochastic rates

Dávid Zoltán Szabó () and Zsolt Bihary ()
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Dávid Zoltán Szabó: Corvinus University of Budapest
Zsolt Bihary: Corvinus University of Budapest

Central European Journal of Operations Research, 2023, vol. 31, issue 2, No 2, 393-415

Abstract: Abstract To efficiently assess the performance of investing in stocks rather than in a bank account for the long run, stochastic interest rate modelling is advocated. We introduce a correlated stochastic interest rate model that addresses this problem. We derive analytic formulas for general spectral risk measures in our setting, and apply our results to Value at Risk, Expected Shortfall and GlueVaR. We characterize the short- and long-term behaviour of these risk measures. We fit our model to financial markets, perform an empirical study and evaluate risk numbers for realistic scenarios in the future. Our results reveal sizeable sensitivities on parameter estimation, but we may conclude that holding stocks for less than a few decades bears significant risk.

Keywords: Asset allocation; Spectral risk measures; Vasicek process; Time diversification; GlueVaR (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10100-022-00814-4

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