Modelling risk in multi asset-class portfolios

Abstract

Using a simulation based model, with the Black-Scholes framework for equity andThe LIBOR Market Model for interest rates, we study market risk in multi assetclassportfolios, with static and dynamic weighting. The risk measures consideredare Value-at-Risk and Expected-Tail-Loss. The theoretical foundation is introducedand imperfections in the models and their assumptions are pointed out.The validity of the models and risk measures is tested using a backtesting procedureagainst data ranging from September 1999 to September 2009, with particularemphasis on the turbulent period of 2007 to September 2009. The results indicatethat the models perform slightly worse on the portfolio with the added complexityof a dynamic weighting regime. No evidence of the models performing lesssatisfactory under the latest financial turbulence is found.