This paper aims to suggest a risk budgeting approach that can enhance the asset
allocation process of retirement reserve funds. The approach takes into
consideration the importance of incorporating risk into tactical decisions to
improve fund performance. The significance of this study lies in the need to
adopt a strong approach that enables asset managers to outperform strategic
asset allocation while avoiding excessive risk. The article proposes a
methodology for measuring and allocating market risk in investment decisions,
through the computation and decomposition of Value at Risk and Expected
Shortfall. Additionally, it introduces a novel scientific method of using
Expected Shortfall and its decomposition into marginal units to guide short-term tactical decision-making.
References
[1]
ACAPS (2020). Activity Report of the Supervisory Authority of Insurance and Social Welfare. https://www.acaps.ma/sites/default/files/publication_documents/acaps_ra_2020_web_vf.pdf
[2]
Al Janabi, M. A. (2012). Risk Management in Trading and Investment Portfolios: An Optimisation Algorithm for Maximum Risk-Budgeting Threshold. Journal of Emerging Market Finance, 11, 189-229. https://doi.org/10.1177/0972652712454516
[3]
Amédée-Manesme, C.-O., Barthélémy, F., & Maillard, D. (2019). Computation of the Corrected Cornish-Fisher Expansion Using the Response Surface Methodology: Application to VaR and CVaR. Annals of Operations Research, 281, 423-453. https://doi.org/10.1007/s10479-018-2792-4
[4]
Artus, P. (2008). Les bienfaits de la crise. Revue d’économie financière, 7, 461-465. https://doi.org/10.3406/ecofi.2008.5250
[5]
Artzner, P., Delbaen, F., Eber, J.-M., & Heath, D. (1999). Coherent Measures of Risk. Mathematical Finance, 9, 203-228. https://doi.org/10.1111/1467-9965.00068
[6]
Bargès, M., Cossette, H., & Marceau, é. (2009). TVaR-Based Capital Allocation with Copulas. Insurance: Mathematics and Economics, 45, 348-361. https://doi.org/10.1016/j.insmatheco.2009.08.002
[7]
Berkelaar, A. B., Kobor, A., & Kouwenberg, R. (2006). Advanced Risk Budgeting Techniques. In M. K. Ong (Ed.), Risk Management (pp. 89-111). Elsevier. https://doi.org/10.1016/B978-012088438-4.50006-X
[8]
Berkelaar, A. B., Kobor, A., & Tsumagari, M. (2006). The Sense and Nonsense of Risk Budgeting. Financial Analysts Journal, 62, 63-75. https://doi.org/10.2469/faj.v62.n5.4283
[9]
Bouyé, é. (2012). Allocation stratégique des actifs et gestion de l’investissement à long terme par les investisseurs institutionnels. Revue d’économie financière, 108, 117-132. https://doi.org/10.3917/ecofi.108.0117
[10]
Brinson, G. P., Singer, B. D., & Beebower, G. L. (1991). Determinants of Portfolio Performance II: An Update. Financial Analysts Journal, 47, 40-48. https://doi.org/10.2469/faj.v47.n3.40
[11]
Chow, G., Kritzman, M., & Van Royen, A. S. (2001). Risk Budgets: Comment. The Journal of Portfolio Management, 27, 109-111. https://doi.org/10.3905/jpm.2001.319818
[12]
Christoffersen, P. F. (2012). Risk Management and Financial Returns. In P. F. Christoffersen (Ed.), Elements of Financial Risk Management (pp. 3-20). Elsevier. https://doi.org/10.1016/B978-0-12-374448-7.00001-4
[13]
Culp, C. L., Miller, M. H., & Neves, A. M. P. (1998). Value at Risk: Uses and Abuses. Journal of Applied Corporate Finance, 10, 26-38. https://doi.org/10.1111/j.1745-6622.1998.tb00307.x
[14]
Da Silva, A. S., Lee, W., & Pornrojnangkool, B. (2008). Risk Budgeting. In F. Fabozzi (Ed.), Handbook of Finance: Investment Management and Financial Management (pp. 195-220). John Wiley & Sons. https://doi.org/10.1002/9780470404324.hof002021
[15]
Darolles, S., Gourieroux, C., & Jay, E. (2012). Robust Portfolio Allocation with Systematic Risk Contribution Restrictions. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2192399
[16]
Fan, G., Zeng, Y., & Wong, W. K. (2012). Decomposition of Portfolio VaR and Expected Shortfall Based on Multivariate Copula Simulation. International Journal of Management Science and Engineering Management, 7, 153-160. https://doi.org/10.1080/17509653.2012.10671219
[17]
Glasserman, P., Heidelberger, P., & Shahabuddin, P. (2000). Variance Reduction Techniques for Estimating Value-at-Risk. Management Science, 46, 1349-1364. https://doi.org/10.1287/mnsc.46.10.1349.12274
[18]
Gourieroux, C., & Jasiak, J. (2010). Value at Risk. In Y. Aït-Sahalia, & L. P. Hansen (Eds.), Handbook of Financial Econometrics: Tools and Techniques (pp. 553-615). North-Holland. https://doi.org/10.1016/B978-0-444-50897-3.50013-4
[19]
Hansson, S. O. (2004). Philosophical Perspectives on Risk. Techné: Research in Philosophy and Technology, 8, 10-35. https://doi.org/10.5840/techne2004818
[20]
Hansson, S. O. (2010). Risk: Objective or subjective, facts or values. Journal of Risk Research, 13, 231-238. https://doi.org/10.1080/13669870903126226
[21]
Haugh, M., Iyengar, G., & Song, I. (2015). A Generalized Risk Budgeting Approach to Portfolio Construction. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2462145
[22]
Jorion, P. (1996). Risk2: Measuring the Risk in Value at Risk. Financial Analysts Journal, 52, 47-56. https://doi.org/10.2469/faj.v52.n6.2039
[23]
Jorion, P. (2003). Portfolio Optimization with Tracking-Error Constraints. Financial Analysts Journal, 59, 70-82. https://doi.org/10.2469/faj.v59.n5.2565
[24]
Kermisch, C. (2012). Vers une définition multidimensionnelle du risque. VertigO: La revue électronique en sciences de l’environnement, 12, 2-15. https://doi.org/10.4000/vertigo.12214
[25]
Kouwenberg, R. (2017). Strategic Asset Allocation and Risk Budgeting for Insurers under Solvency II. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2894809
[26]
Lee, W., & Lam, D. Y. (2001). Implementing Optimal Risk Budgeting. The Journal of Portfolio Management, 28, 73-80. https://doi.org/10.3905/jpm.2001.319824
[27]
Lewis, N. D., Okunev, J., & White, D. (2007). Using a Value at Risk Approach to Enhance Tactical Asset Allocation. The Journal of Investing, 16, 100-107. https://doi.org/10.3905/joi.2007.698968
[28]
Lhabitant, F. (2004). Hedge Funds: Quantitative Insights. Wiley. https://doi.org/10.1002/9781118673546
[29]
Manganelli, S., & Engle, R. F. (2001). Value at Risk Models in Finance. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.356220
[30]
Mina, J., & Xiao, J. Y. (2001). Return to RiskMetrics: The Evolution of a Standard. https://www.msci.com/documents/10199/dbb975aa-5dc2-4441-aa2d-ae34ab5f0945
[31]
Muromachi, Y. (2009). Decomposing Total Risk of a Portfolio into the Contributions of Individual Assets. https://www.actuaries.org/ASTIN/Colloquia/Helsinki/Papers/S5_19_Muromachi.pdf
[32]
Nagy, M., Paulik, é., & Ladányi, S. (2019). The New Conceptual Risk Budget Framework and Implementation of the New FX Reserves Investment Strategy at the Central Bank of Hungary. BIS Papers No 104. https://www.bis.org/publ/bppdf/bispap104k.pdf
[33]
Pearson, N. D. (2002). Risk Budgeting: Portfolio Problem Solving with Value-at-Risk. John Wiley and Sons.
[34]
Pierandrei, L. (2019). Risk Management. Dunod. https://doi.org/10.3917/dunod.piera.2019.01
[35]
Racicot, F.-E., & Théoret, R. (2006). Finance computationnelle et gestion des risques: Ingénierie financière avec applications Excel (visual basic) et Matlab. Presses de l’Université du Québec. https://doi.org/10.2307/j.ctv18ph6c6
[36]
Razali, N. M., & Wah, Y. B. (2011). Power Comparisons of Shapiro-Wilk, Kolmogorov-Smirnov, Lilliefors and Anderson-Darling Tests. Journal of Statistical Modeling and Analytics, 2, 21-33.
[37]
Sarykalin, S., Serraino, G., & Uryasev, S. (2008). Value-at-Risk vs. Conditional Value-at-Risk in Risk Management and Optimization. In Z.-L. Chen, S. Raghavan, P. Gray, & H. J. Greenberg (Eds.), State-of-the-Art Decision-Making Tools in the Information-Intensive Age (pp. 270-294). INFORMS. https://doi.org/10.1287/educ.1080.0052
[38]
Schneeweis, T., Crowder, G. B., & Kazemi, H. B. (2010). Risk Budgeting and Asset Allocation. In T. Schneeweis, G. B. Crowder, & H. B. Kazemi (Eds.), The New Science of Asset Allocation: Risk Management in a Multi-Asset World (pp. 195-211). John Wiley & Sons. https://doi.org/10.1002/9781118268223.ch9
[39]
Schneider, D. H., & Sams, D. (2009). UniSuper’s Approach to Risk Budgeting. https://www.actuaries.asn.au/Library/Con09_paper_Schneider_UniSupers%20Approach%20to%20Risk%20Budgeting.pdf
[40]
Scott, L. O. (1991). Financial Market Volatility: A Survey. Staff Papers—International Monetary Fund, 38, 582. https://www.jstor.org/stable/3867159
[41]
Sharpe, W. F. (2002). Budgeting and Monitoring Pension Fund Risk. Financial Analysts Journal, 58, 74-86. https://doi.org/10.2469/faj.v58.n5.2470
[42]
Unger, A. (2015). The Use of Risk Budgets in Portfolio Optimization. Springer Fachmedien Wiesbaden. https://doi.org/10.1007/978-3-658-07259-9
[43]
Urwin, R. C., Breban, S. J., Hodgson, T. M., & Hunt, A. (2001). Risk Budgeting in Pension Investment. British Actuarial Journal, 7, 319-347. https://doi.org/10.1017/S1357321700002385
[44]
Vlaar, P. J. G. (2000). Value at Risk Models for Dutch Bond Portfolios. Journal of Banking and Finance, 24, 1131-1154. https://doi.org/10.1016/S0378-4266(99)00068-0
[45]
Yildirim, I. (2015). Financial Risk Measurement for Turkish Insurance Companies Using VaR Models. Journal of Financial Risk Management, 4, 158-167. https://doi.org/10.4236/jfrm.2015.43013
