Term Structure Of Risk, The Role Of Known And Unknown Risks And Non-Stationary Distributions

In this paper the authors document the presence of a term structure of risk and they propose how to measure it using alternative models to forecast volatility and the Value at Risk at different horizons. They then quantify the benefits of an investor that is aware of the existence of a term structure of risk in the context of an asset allocation exercise. In addition, there is a concern that the vast global derivatives market, the number of unregulated hedge funds, the merging of financial markets across national borders and the explosive growth of private equity funds, make the financial system more unstable and susceptible to meltdown.