Portfolio optimization when risk factors are conditionally varying and heavy tailed

@article{Doganoglu2007PortfolioOW,
  title={Portfolio optimization when risk factors are conditionally varying and heavy tailed},
  author={Toker Doganoglu and Christoph Hartz and Stefan Mittnik},
  journal={Computational Economics},
  year={2007},
  volume={29},
  pages={333-354}
}
Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical approach to portfolio selection. It takes both the conditionally varying volatility and the fat… 

Un-diversifying during crises: Is it a good idea?

High levels of correlation among financial assets and extreme losses are typical during crises. In such situations, investing in few assets might be a better choice than holding diversified

Stable Mixture GARCH Models

A new model class for univariate asset returns is proposed which involves the use of mixtures of stable Paretian distributions, and readily lends itself to use in a multivariate context for portfolio selection, and is shown to outperform all its special cases.

Robust Portfolio Optimization

Since the 2008 Global Financial Crisis, the financial market has become more unpredictable than ever before, and it seems set to remain so in the forseeable future. This means an investor faces

Forming Efficient Frontier in Stock Portfolios by Utility Function, Risk Aversion, and Target Return

Asset allocation has always been a challenging issue / for individuals and businesses to survive in our competitive world. One of the famous businesses, which has an enormous impact on people's lives

Grading Investment Diversification Options in Presence of Non-Historical Financial Information

Modern portfolio theory deals with the problem of selecting a portfolio of financial assets such that the expected return is maximized for a given level of risk. The forecast of the expected

Estimating Stable Factor Models By Indirect Inference

Financial returns exhibit common behavior described at best by factor models, but also fat tails, which may be captured by α-stable distributions. This paper concentrates on estimating factor models

A Multivariate Stable Model for the Distribution of Portfolio Returns

The appealing properties of the stable Paretian distribution is used to model the heavy tails and the GARCH model to capture the phenomenon of the volatility clustering to be applied to daily U.S. stock returns.

An empirical analysis of heavy-tails behavior of financial data: The case for power laws

This article aims at underlying the importance of a correct modelling of the heavy-tail behavior of extreme values of financial data for an accurate risk estimation. Many financial models assume that

Estimating Stable Latent Factor Models by Indirect Inference

Cross-sections of financial returns are characterized by common underlying factors and exhibit fat tails that may be captured by α-stable distributions. This paper focuses on estimating factor models

References

SHOWING 1-10 OF 42 REFERENCES

CAPM, Risk and Portfolio Selection in «Stable» Markets

Our main purpose in this paper is to derive the generalized equilibrium relationship between risk and return under the assumption that the asset returns follow a joint symmetric $\alpha$-stable

Simple Rules for Optimal Portfolio Selection In Stable Paretian Markets

IT IS WELL KNOWN that when the joint probability distribution of secu-rity returns is multivariate normal, optimal portfolios for all risk-averse investors lie on the Markowitz-Tobin mean, variance

Abstract: Capital Market Equilibrium in a Mean-Lower Partial Moment Framework

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive the valuation formulas for the equilibrium value of risky assets and

Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence

Abstract A new asset pricing model that generalizes earlier results in the downside risk literature is developed and empirically tested using a multivariate approach. By specifying risk as deviations

Portfolio Analysis in a Stable Paretian Market

Recently evidence has come forth which suggests that empirical probability distributions of returns on securities conform better to stable Paretian distributions with infinite variances than to the

Generalized Market Equilibrium: "Stable" CAPM

Our main purpose in this paper is to derive the generalized equilibrium relationship between risk and return under the assumption that the asset returns follow a joint symmetric stable distribution.

Stable GARCH models for financial time series

Risk, Return, and Equilibrium

  • E. Fama
  • Economics
    Journal of Political Economy
  • 1971
Sharpe (1964) and Lintner (11965a, 1965b) have presented a model directed at the following questions. (a) What is the appropriate measure of the risk of an investment asset? And (b) what is the

Modeling asset returns with alternative stable distributions

In the 1960's Benoit Mandelbrot and Eugene Fama argued strongly in favor of the stable Paretian distribution as a model for the unconditional distribution of asset returns. Although a substantial

Elements of Financial Risk Management