Risk Horizon and Rebalancing Horizon
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Wed, 11/03/2009 14:15 |
Paul Glasserman (Columbia) |
Nomura Seminar  |
Oxford-Man Institute |
| We analyze the impact of portfolio rebalancing frequency on the measurement of risk over a moderately long horizon. This problem arises from an incremental capital charge recently proposed by the Basel Committee on Banking Supervision. The new risk measure calculates VaR over a one-year horizon at a high confidence level and assigns different rebalancing frequencies to different types of assets to capture potential illiquidity. We analyze the difference between discretely and continuously rebalanced portfolios in a simple model of asset dynamics by examining the limit as the rebalancing frequency increases. This leads to alternative approximations at moderate and extreme loss levels. We also show how to incorporate multiple scales of rebalancing frequency in the analysis | |||