The riskiness of stock versus money market investment with stochastic rates

Szabó, Dávid Zoltán and Bihary, Zsolt (2022) The riskiness of stock versus money market investment with stochastic rates. CENTRAL EUROPEAN JOURNAL OF OPERATIONS RESEARCH . DOI 10.1007/s10100-022-00814-4

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To efficiently assess the performance of investing in stocks rather than in a bank account for the long run, stochastic interest rate modelling is advocated. We introduce a correlated stochastic interest rate model that addresses this problem. We derive analytic formulas for general spectral risk measures in our setting, and apply our results to Value at Risk, Expected Shortfall and GlueVaR. We characterize the short- and long-term behaviour of these risk measures. We fit our model to financial markets, perform an empirical study and evaluate risk numbers for realistic scenarios in the future. Our results reveal sizeable sensitivities on parameter estimation, but we may conclude that holding stocks for less than a few decades bears significant risk.

Item Type:Article
Uncontrolled Keywords:Asset allocation, Spectral risk measures, Vasicek process, Time diversification, GlueVaR
JEL classification:G11 - Portfolio Choice; Investment Decisions
ID Code:7578
Deposited By: MTMT SWORD
Deposited On:30 Aug 2022 07:03
Last Modified:30 Aug 2022 07:03

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