Location of Repository

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

Suggested articles

Preview

Citations

  1. (2001). A large deviation approach to portfolio analysis, working paper,
  2. (2000). A portfolio performance index, doi
  3. (1989). Asset pricing in a generalized mean-lower partial moment framework: theory and evidence, doi
  4. (2000). Conditional skewness in asset pricing tests, doi
  5. (2003). Conditional volatility, skewness, and kurtosis: Existence, persistence, and comovement, doi
  6. (1999). Estimating Gram-Charlier expansions with positivity constraints, working paper, Banque de France .
  7. (1980). Increasing downside risk,
  8. (1985). Introduction to Nonlinear Optimization,
  9. (1977). Introduction to Probability and Measure, doi
  10. (1973). Linear Statistical Inference and Its Applications, doi
  11. (1946). Mathematical Methods of Statistics, doi
  12. (2002). Multi-moments methods for portfolio management: Generalized CAPM in homogeneous and heterogeneous markets, working paper . doi
  13. (1997). Numerical Analysis,
  14. (2004). On conditional moments of GARCH models, with applications to multiple period value,
  15. (2004). On the importance of skewness and asymmetric dependence in stock returns for asset allocation, doi
  16. (1997). On the large deviation, Theory of Probability and Its Applications 44(1): 75–92.48 Chu, Knight and Satchell. doi
  17. (2001). Optimal asset allocation for endowments: A large deviation approach, working paper, doi
  18. (2003). Portfolio choice with endogeneous utility: A large deviation approach, doi
  19. (1952). Portfolio selection, doi
  20. (1978). Safety-first, stochastic dominance, and optimal portfolio choice, doi
  21. (2003). Semiparametric estimation of Value at Risk, doi
  22. (1982). Skewness preference and portfolio choice, doi
  23. (1995). Statistical modelling of asymmetric risk in asset returns, doi
  24. (1987). Theory of Financial Decision Making, Rowman & Littlefield,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.