A single-period model and some empirical evidences for asset allocation in a value-at-risk framework

This paper considers the optimal asset allocation problems under valueat- risk (VaR) constraints by deriving a single-period optimal asset allocation model (VaR model). The model reveals that the optimal allocation of funds in risky assets is dependent on the distribution of the returns of risky assets and the VaR level, but independent of the acceptable loss ratio. The acceptable loss ratio only plays a role in determining the amount to be borrowed or lent at the risk-free rate. As an application of the model, the optimal asset allocation between two asset classes, bonds and stocks, is addressed. The empirical results obtained for the US, Australia and the UK show that the mechanism of asset allocation under VaR constraints is fundamentally different from the classical mean-variance approach.