An Economic Evaluation of Model Risk in Long‐Term Asset Allocations

17 Pages Posted: 16 Jul 2013

See all articles by Christophe Boucher

Christophe Boucher

University of Lorraine

Gregory Mathieu Jannin

University Paris-1 Panthéon-Sorbonne; ABN AMRO ADVISORS - QCG

Patrick Kouontchou

University of Lorraine - CEREFIGE

Bertrand B. Maillet

EMLyon Business School (Paris Campus)

Date Written: August 2013

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 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.

Suggested Citation

Boucher, Christophe and Jannin, Gregory Mathieu and Kouontchou, Patrick and Maillet, Bertrand B., An Economic Evaluation of Model Risk in Long‐Term Asset Allocations (August 2013). Review of International Economics, Vol. 21, Issue 3, pp. 475-491, 2013. Available at SSRN: https://ssrn.com/abstract=2294291 or http://dx.doi.org/10.1111/roie.12049

Christophe Boucher

University of Lorraine ( email )

Lorraine
France

Gregory Mathieu Jannin

University Paris-1 Panthéon-Sorbonne ( email )

Department of Management Sciences (PRISM-Sorbonne)
17 rue de la Sorbonne
Paris, 75005
France

HOME PAGE: http://www.univ-paris1.gregoryjannin.com

ABN AMRO ADVISORS - QCG ( email )

3 avenue hoche
Paris, 75008
France

HOME PAGE: http://www.abnamro.com

Patrick Kouontchou

University of Lorraine - CEREFIGE ( email )

UFR DEA, Ile du Saulcy
Metz, 57045
France
033665778342 (Phone)

Bertrand B. Maillet

EMLyon Business School (Paris Campus) ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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