Financial crisis: a new measure for risk of pension funds assets

TitleFinancial crisis: a new measure for risk of pension funds assets
Publication TypeWorking Paper
Year of Publication2012
AuthorsCadoni, M, Melis, R, Trudda, A
Keywordsmultifractional brownian motion, pension funds, risk control

It has been debated that pension funds should have limitations on their asset allocation, based on the risk profile of the different financial instruments available on the financial markets. This issue proves to be highly relevant at times of market crisis, when a regulation establishing limits to risk taking for pension funds could prevent defaults. In this paper we present a framework for evaluating the risk level of a single financial instrument or a portfolio. By assuming that asset returns can be described by a multifractional Brownian motion, we evaluate the risk using the time dependent Hurst parameter H(t) which models volatility. To provide a measure of the risk, we model the Hurst parameter with a random variable with beta distribution. We prove the efficacy of the methodology by implementing it on different risk level financial instruments and portfolios.

Citation Key3839
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