# 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 C. Hartz and S. 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… Expand

#### 27 Citations

Portfolio optimization for heavy-tailed assets: Extreme Risk Index vs. Markowitz

- Mathematics, Economics
- 2015

Using daily returns of the S&P 500 stocks from 2001 to 2011, we perform a backtesting study of the portfolio optimization strategy based on the extreme risk index (ERI). This method uses multivariate… Expand

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

- Computer Science
- Comput. Manag. Sci.
- 2019

It is shown empirically that the sparse portfolio weights can successfully cope with bear markets by shrinking portfolio weights and total amount of shorting, and the diversification relationships between the minimum variance portfolio, risk budgeting strategies and diversification-constrained portfolios are highlighted. Expand

Stable Mixture GARCH Models

- Computer Science
- 2011

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. Expand

Un-Diversifying During Crises: Is It a Good Idea?

- Economics
- 2016

High levels of correlation among financial assets, as well as extreme losses, are typical during crisis periods. In such situations, quantitative asset allocation models are often not robust enough… Expand

Robust Portfolio Optimization

- Economics
- 2017

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… Expand

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

- Economics
- 2021

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… Expand

Estimating Stable Factor Models By Indirect Inference

- Mathematics
- 2014

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… Expand

A Multivariate Stable Model for the Distribution of Portfolio Returns

- 2006

In this paper we combine the appealing properties of the stable Paretian distribution to model the heavy tails and the GARCH model to capture the phenomenon of the volatility clustering. We assume… Expand

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

- Economics
- 2013

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… Expand

Forecasting Financial Time Series: Normal GARCH with Outliers or Heavy Tailed Distribution Assumptions?

- Economics
- 2011

The use of GARCH models is widely used as an effective method for capturing the volatility clustering inherent in financial returns series. The residuals from such models are however often… Expand

#### References

SHOWING 1-10 OF 41 REFERENCES

CAPM, Risk and Portfolio Selection in «Stable» Markets

- Mathematics
- 2000

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… Expand

Simple Rules for Optimal Portfolio Selection In Stable Paretian Markets

- Economics
- 1979

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… Expand

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

- Economics
- 1977

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… Expand

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

- Economics
- 1989

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 below… Expand

Capital market equilibrium in a mean-lower partial moment framework

- Economics
- 1977

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive formulae for the equilibrium values of risky assets that hold for… Expand

Portfolio Analysis in a Stable Paretian Market

- Economics
- 1965

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… Expand

Generalized Market Equilibrium: "Stable" CAPM

- Economics
- 1995

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.… Expand

Stable GARCH models for financial time series

- Mathematics
- 1995

Abstract Generalized autoregressive conditional heteroskedasticity (GARCH) models having normal or Student-t distributions as conditional distributions are widely used in financial modeling. Normal… Expand

Risk, Return, and Equilibrium

- 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… Expand

Modeling asset returns with alternative stable distributions

- Economics
- 1993

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… Expand