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Optimal long term investment in a jump diffusion setting : a large deviation approach

By Ba M. Chu, John L. Knight and S. (Stephen) Satchell

Abstract

In this study, we propose a new method based on the large deviations theory to select\ud an optimal investment for a large portfolio such that the risk, which is defined as the probability\ud that the portfolio return underperforms an investable benchmark, is minimal. As a\ud particular case, we examine the effect of two types of asymmetric dependence; 1) asymmetry\ud in a portfolio return distribution, and 2) asymmetric dependence between asset returns, on\ud the optimal portfolio invested in two risky assets. Furthermore, since our analysis is based\ud on a parametric framework, this allows us to formulate a close-form relationship between\ud the measures of correlation and the optimal portfolio. Finally, we calibrate our method\ud with equity data, namely S&P 500 and Bangkok SET. The empirical evidences confirm\ud that there is a significant impact of asymmetric dependence on optimal portfolio and risk

Topics: HG
Publisher: Warwick Business School Financial Econometrics Research Centre
Year: 2006
OAI identifier: oai:wrap.warwick.ac.uk:1765

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