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Financial crisis: a new measure for risk of pension funds assets

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  • M. Cadoni
  • R. Melis
  • A. Trudda

Abstract

It has been debated that pension funds should have limitations on their asset allocation, based on the risk profile of the different financial instruments available on the financial markets. This issue proves to be highly relevant at times of market crisis, when a regulation establishing limits to risk taking for pension funds could prevent defaults. In this paper we present a framework for evaluating the risk level of a single financial instrument or a portfolio. By assuming that asset returns can be described by a multifractional Brownian motion, we evaluate the risk using the time dependent Hurst parameter H(t) which models volatility. To provide a measure of the risk, we model the Hurst parameter with a random variable with beta distribution. We prove the efficacy of the methodology by implementing it on different risk level financial instruments and portfolios.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201231.

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Date of creation: 2012
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Handle: RePEc:cns:cnscwp:201231

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Keywords: pension funds; risk control; multifractional brownian motion;

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  1. Sergio Bianchi, 2005. "Pathwise Identification Of The Memory Function Of Multifractional Brownian Motion With Application To Finance," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 255-281.
  2. Sergio, Bianchi & Alessandro, Trudda, 2008. "Global Asset Return in Pension Funds: a dynamical risk analysis," MPRA Paper 12011, University Library of Munich, Germany, revised 14 Jun 2008.
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