Abstract
There is a risk of extreme events in financial markets. This risk is often understated as we have seen in portfolios of subprime mortgages during the 2008 financial crisis. The goal of this study is to draw inferences about the cross-section of VaR estimates for different asset allocation funds. The study answers this question for 7 different asset allocations 100% stock (S), 100% T’bonds (B), 100% T’bills (or Cash), .4S+.4B+.2Cash, .6S+.4B, .8S+.2B, and .8S+.2Cash. Further, the present study determines that stock-bond-bill asset allocation over a five-year planning period which minimizes VaR while earning a minimum of 7% return is 72.3% stocks and 27.7% bonds.
Highlights
SSE 2019 Sensitivity of Value at Risk to different asset allocation Strategies during retirement The risk of extreme events is present in financial markets
Value at Risk (VaR) can be used by any entity to measure its risk exposure; it is used most often by commercial and investment banks to capture the potential loss in value of their traded portfolios from adverse market movements over a specified period; this can be compared to their available capital and cash reserves to ensure that the losses can be covered without putting the firms at risk
VI CONCLUSION There is a risk of extreme events in financial markets
Summary
SSE 2019 Sensitivity of Value at Risk to different asset allocation Strategies during retirement The risk of extreme events is present in financial markets. The potential occurrence of risk events posed by portfolios of subprime mortgages was underestimated during the financial crisis of 2008. Value at risk (Value-at-risk, or abbreviated VaR) is the maximum-minimum loss of financial position over a given period at a given confidence interval (Jorion, 2007). Value at Risk (VaR) is a commonly used important measure of risk. Value at risk can be used to quantify the probability and the level of potential loss in a portfolio over some time. Potential retirees can determine whether they have sufficient fund reserves in place to cover possible losses or whether risks require them to reduce portfolio holdings
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