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

Christophe Boucher (), Gregory Jannin (), Patrick Kouontchou () and Bertrand Maillet
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Christophe Boucher: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Gregory Jannin: PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne
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 during the 1990s as the industry standard for risk management and become today a key tool for asset allocation. This paper illustrates and estimates model risk, and focuses on the evaluation of its impact on optimal portfolios at various time horizons. Based on a long sample of US data, the paper finds a non-linear relation between VaR model errors and the horizon that impacts optimal asset allocations.

Keywords: Economic models; Asset allocation; Financialcrises; Risk management in business; Financial institutions; Value at risk; Economic impact (search for similar items in EconPapers)
Date: 2013
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Published in Review of International Economics, 2013, 21 (3), pp.475 - 491. ⟨10.1111/roie.12049⟩

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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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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01369201

DOI: 10.1111/roie.12049

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