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Optimal investment and asymmetric risk for a large portfolio: a large deviations approach

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


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

Topics: HG
Publisher: Warwick Business School, Financial Econometrics Research Centre
OAI identifier: oai:wrap.warwick.ac.uk:1762

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