Allocating and forecasting changes in risk
24 Pages Posted: 9 Feb 2023
Date Written: September 5, 2022
We consider time-dependent portfolios and discuss the allocation of changes in the risk of a portfolio to changes in the portfolio’s components. For this purpose we adopt established allocation principles. We also use our approach to obtain forecasts for changes in the risk of the portfolio’s components. To put the approach into practice we present an implementation based on the output of a simulation. Allocation is illustrated with an example portfolio in the context of Solvency II. The quality of the forecasts is investigated with an empirical study.
Keywords: portfolio risk, allocation, forecast, covariance principle, conditional expectation principle
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