Beyond ‘Bayesian vs. Var’ Dilemma to Empirical Model Risk Management: Managing Risk for Hedge Funds

Malhotra, Yogesh. Beyond 'Bayesian vs. VaR' Dilemma to Empirical Model Risk Management: Managing Risk for Hedge Funds, IUP Journal of Financial Risk Management. Jun 2022, Vol. 19 Issue 2, p 5-51. 47p.

52 Pages Posted: 6 Jan 2023 Last revised: 9 Jan 2023

See all articles by Yogesh Malhotra

Yogesh Malhotra

Amazon Web Services Partner; Global Risk Management Network, LLC

Date Written: December 12, 2022

Abstract

In the aftermath of the Global Financial Crisis, some risk management practitioners have advocated wider adoption of Bayesian inference to replace Value- at-Risk (VaR) models in order to minimize risk failures. Despite its limitations, the Bayesian methodology has significant advantages. Just like all other quantitative models, VaR—[mostly] non-Bayesian and [increasingly] Bayesian—continues to be a key methodological foundation of risk management and regulation-related risk modeling practices in global finance. Many studies have noted that Bayesian inference modeling and VaR modeling frameworks facilitate model risk management for minimizing risks. VaR frameworks are empirically applied for hedge fund risk modeling of multi-asset fund of funds portfolios of a large investment bank. In this study, multiple risk models and measures with transparent assumptions to cross-validate convergent findings across multiple levels of risk analysis are examined for empirical model risk management.


Journal granted non-exclusive copyright to publish the article: Author retains all copyrights:
Malhotra, Yogesh. Beyond 'Bayesian vs. VaR' Dilemma to Empirical Model Risk Management: Managing Risk for Hedge Funds, IUP Journal of Financial Risk Management. Jun 2022, Vol. 19 Issue 2, p5-51. 47p.

© Copyright Dr. Yogesh Malhotra, www.YogeshMalhotra.com. All Rights Reserved, 2022.

Keywords: Model Risk Management, Risk Modeling, Bayesian Inference, VaR, Portfolio Construction, Portfolio Optimization, Fund of Funds, Hedge Funds

JEL Classification: B23, C1, C10, C11, C12, C13, C14, C15, C19, C22, C32, C4, C5, C51, C52, D81, G11

Suggested Citation

Malhotra, Yogesh, Beyond ‘Bayesian vs. Var’ Dilemma to Empirical Model Risk Management: Managing Risk for Hedge Funds (December 12, 2022). Malhotra, Yogesh. Beyond 'Bayesian vs. VaR' Dilemma to Empirical Model Risk Management: Managing Risk for Hedge Funds, IUP Journal of Financial Risk Management. Jun 2022, Vol. 19 Issue 2, p 5-51. 47p., Available at SSRN: https://ssrn.com/abstract=4301788

Yogesh Malhotra (Contact Author)

Amazon Web Services Partner ( email )

United States

HOME PAGE: http://YogeshMalhotra.com/

Global Risk Management Network, LLC ( email )

New Hartford, NY 13413
United States
+1-(646) 801-3644 (Phone)

HOME PAGE: http://YogeshMalhotra.com/bio.html

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