The authors acknowledge the editors, the two anonymous referees, as well as Christoph Becker, Monica Billio, Massimiliano Caporin, Rama Cont, Christophe Hurlin, Gianluca Marcato, Christophe Pérignon, Michaël Rockinger, Thierry Roncalli, and Jean-Michel Zakoïan for comments and suggestions when preparing this article. We are especially grateful to Jòn Daníelsson for helpful discussions on related works on this subject. The first author thanks the Banque de France Foundation and the fourth the Risk Foundation Chair Dauphine-ENSAE-Groupama “Behavioral and Household Finance, Individual and Collective Risk Attitudes” (Louis Bachelier Institute) for financial support.
An Economic Evaluation of Model Risk in Long-term Asset Allocations
Article first published online: 14 JUL 2013
© 2013 John Wiley & Sons Ltd
Review of International Economics
Volume 21, Issue 3, pages 475–491, August 2013
How to Cite
Boucher, C., Jannin, G., Kouontchou, P. and Maillet, B. (2013), An Economic Evaluation of Model Risk in Long-term Asset Allocations. Review of International Economics, 21: 475–491. doi: 10.1111/roie.12049
- Issue published online: 14 JUL 2013
- Article first published online: 14 JUL 2013
- Banque de France Foundation
- Risk Foundation Chair Dauphine-ENSAE-Groupama “Behavioral and Household Finance, Individual and Collective Risk Attitudes” (Louis Bachelier Institute)
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.