Evaluating the style-based risk model for equity mutual funds investing in Europe

Abstract

American equity mutual funds of varying investment styles investing in Europe is examined, using Value at Risk (VaR) and expected tail loss (ETL) models developed through three techniques (parametric, nonparametric and style-based approach). Alternative VaR and ETL implementations might impact the market risk forecast. It is necessary to avoid biasing fund risk estimates. Particular attention is given to the style-based risk approach by comparing it to the other methods. A performance evaluation of the models is approached from two directions: statisical model selection and model selection based on a loss function. The empirical results show that the particular investment style of a mutual fund must guide and determine which VaR and ETL model may be applied in order to extract accurate risk estimates. For the least diversified funds that overweight growth and underweight value stocks, the style-based risk model produce significantly lower VaR and ETL estimates than do the other models. The results for the...