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

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  • Christophe Boucher
  • Gregory Jannin
  • Patrick Kouontchou
  • Bertrand Maillet

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.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Christophe Boucher & Gregory Jannin & Patrick Kouontchou & Bertrand Maillet, 2013. "An Economic Evaluation of Model Risk in Long-term Asset Allocations," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 475-491, August.
    • Handle: RePEc:bla:reviec:v:21:y:2013:i:3:p:475-491
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