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

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Listed:
  • Christophe Boucher

    (A.A.Advisors-QCG - ABN AMRO, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

  • Gregory Jannin

    (PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne)

  • Bertrand Maillet

    (A.A.Advisors-QCG - ABN AMRO, EIF - Europlace Institute of Finance, LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

  • Patrick Kouontchou

    (CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

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.

Suggested Citation

  • Christophe Boucher & Gregory Jannin & Bertrand Maillet & Patrick Kouontchou, 2013. "An Economic Evaluation of Model Risk in Long-term Asset Allocations," Working Papers halshs-00825303, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00825303
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00825303
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    References listed on IDEAS

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