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Asset Allocation in a Value-at-Risk Framework

Ronald Huisman
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Kees C. G. Koedijk
Tilburg University - Department of Finance

Rachel A.J. Campbell
Maastricht University - Limburg Institute of Financial Economics (LIFE); Erasmus University Rotterdam (EUR) - Department of Financial Management

April 27, 1999

Abstract:
In this paper we develop an asset allocation model which allocates assets by maximising expected return subject to the constraint that the expected maximum loss should meet the Value-at-Risk limits set by the risk manager. Similar to the mean-variance approach a performance index like the Sharpe index is constructed. Furthermore it is shown that the model nests the mean-variance approach in case of normally distributed expected returns. We provide an empirical analysis using two assets: US stocks and bonds. The results highlight the influence of non-normal characteristics of the expected return distribution on the optimal asset allocation.

JEL Classifications: G11, G12

Working Paper Series

Date posted: August 03, 1999 ; Last revised: August 03, 1999

Suggested Citation

Huisman, Ronald, Koedijk, Kees C. G. and Campbell, Rachel A.J., Asset Allocation in a Value-at-Risk Framework (April 27, 1999). Available at SSRN: http://ssrn.com/abstract=163970 or doi:10.2139/ssrn.163970

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Contact Information

Rachel Ann Jane Campbell (Contact Author) Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email ) P.O. Box 616 6200 MD Maastricht Netherlands +31 4 3388 4827 (Phone) +31 4 3388 4875 (Fax)
Erasmus University Rotterdam (EUR) - Department of Financial Management ( email ) P.O. Box 1738 T59 PO Box 1738 3000 DR Rotterdam Rotterdam 3000 DR Netherlands +31 10 4081255 (Phone) +31 10 4089017 (Fax)
Ronald Huisman Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email ) P.O. Box 1738 3000 DR Rotterdam NL 3062 PA Netherlands
Kees G. Koedijk Tilburg University - Department of Finance ( email ) P.O. Box 90153 5000 LE Tilburg Netherlands +31 13 4663048 (Phone) +31 13 4662052 (Fax)