Monte-Carlo Estimations of the Downside Risk of Derivative Portfolios

We simulate the performance of a standard derivatives portfolio to evaluate the relevance of benchmarking in terms of doenside risk reduction. The simulation shows that benchmarking always leads to significantly more servere losses in average than those generated by letting the portfolio reach the end of a given horizon. Moreover, switching from a 0-correlation across underlyings to a very mild form of correclation significantly increased the probability of reaching the downside benchmark before maturity, whereas aadding more correlation does not significantly increase this figure

Financial crisis, intervention and performance measurement

Aspects of the financial markets that became apparent in the 2008 crisis were exacerbated by the intervention of monetary authorities. Financial markets under stress validate the general concept of Prospect Theory, under certain assumptions about the distributional characteristics of asset returns. This validation points to the need for re-examining performance metrics, such as the Sharpe Ratio and the Information Ratio. This analysis proposes new ratios that accommodate a higher moment of the portfolio return distribution. This alteration is reflected by the qualitative analysis of investment managers, which is performed by the performance evaluation industry, as it pertains to fixed income.peer-reviewe

Portfolio optimisation with higher moments of risk at the Pakistan Stock Exchange

Stock markets play an important role in spurring economic growth and development through diversification opportunities. However, diversification cannot be truly achieved if we continue to ignore additional dimensions of risk, namely skewness and kurtosis. This study incorporates higher moments of risk to form a mean-varianceskewness-kurtosis based framework for portfolio optimisation. Inclusion of higher moments in optimisation framework acknowledges the risk of asymmetric returns and fat-tail risk and can help investors in formulating optimal portfolios of stocks which can be significantly divergent from the ones they obtain through the Markowitz meanvariance optimisation. Our results confirm the presence of tradeoff between returns and additional dimensions of risk in Pakistan Stock Exchange (PSX) and strongly suggest including them in the optimisation framework to avoid sub-optimal decisions and to curtail exposure towards higher moments of risks

Investor’s behaviour and the relevance of asymmetric risk measures

Numerous articles use the Markowitz mean-variance approach for computing the capital asset pricing model (CAPM) and to determine the best set of assets an investor should hold. But using a symmetric risk measure is not necessarily straightforward in the mind of many investors. Many other approaches to determine a portfolio composition, e.g. faith or other behavioral determinants, appear more natural. Especially an asymmetric downside risk approach is more appealing to many investors. This work investigates the differences between portfolios based on a symmetric and on an asymmetric risk measure. Based on the Behavioral Portfolio Theory (BTP) model by Shefrin and Statman and the Markowitz classical portfolio approach the authors compare portfolios composed by stocks of the French SBR 120 market over a period of 6 years. Simulation of 100,000 virtual portfolios over the study period shows that there are only minor differences between portfolios obtained by downside or symmetric risk. Therefore, the results leave room for taking into consideration other choice criteria to complete the approach, such as the computing power if an investor wants to use much more demanding downside risk methodology or faith bases selection criteria to pick the assets

Optimal Credit Swap Portfolios

This paper formulates and solves the selection problem for a portfolio of credit swaps. The problem is cast as a goal program that entails a constrained optimization of preference-weighted moments of the portfolio value at the investment horizon. The portfolio value takes account of the exact timing of protection premium and default loss payments, as well as any mark-to-market profits and losses realized at the horizon. The constraints address collateral and solvency requirements, initial capital, position limits, and other trading constraints that credit swap investors often face in practice. The multimoment formulation accommodates the complex distribution of the portfolio value, which is a nested expectation under risk-neutral and actual probabilities. It also generates computational tractability. Numerical results illustrate the features of optimal portfolios. In particular, we find that credit swap investment constraints can have a significant impact on optimal portfolios, even for simple investment objectives. Our problem formulation and solution approach extend to corporate bond portfolios and mixed portfolios of corporate bonds and credit derivatives

A Reassessment of the Potential for Loss-framed Incentive Contracts to Increase Productivity: A Meta-analysis and a Real-effort Experiment

Substantial productivity increases have been reported when incentives are framed as losses rather than gains. Loss-framed contracts have also been reported to be preferred by workers. The results from our meta-analysis and real-effort experiment challenge these claims. The meta-analysis\u27 summary effect size of loss framing is a 0.16 SD increase in productivity. Whereas the summary effect size in laboratory experiments is a 0.33 SD, the summary effect size from field experiments is 0.02 SD. We detect evidence of publication biases among laboratory experiments. In a new laboratory experiment that addresses prior design weaknesses, we estimate an effect size of 0.12 SD. This result, in combination with the meta-analysis, suggests that the difference between the effect size estimates in laboratory and field experiments does not stem from the limited external validity of laboratory experiments, but may instead stem from a mix of underpowered laboratory designs and publication biases. More- over, in our experiment, most workers preferred the gain-framed contract and the increase in average productivity is only detectable in the subgroup of workers (20%) who preferred the loss-framed contracts. Based on the results from our experiment and meta-analysis, we believe that behavioral scientists should better assess preferences for loss-framed contracts and the magnitude of their effects on productivity before advocating for greater use of such contracts among private and public sector actors

On Wasserstein Distributionally Robust Mean Semi-Absolute Deviation Portfolio Model: Robust Selection and Efficient Computation

This paper focuses on the Wasserstein distributionally robust mean-lower semi-absolute deviation (DR-MLSAD) model, where the ambiguity set is a Wasserstein ball centered on the empirical distribution of the training sample. This model can be equivalently transformed into a convex problem. We develop a robust Wasserstein profile inference (RWPI) approach to determine the size of the Wasserstein radius for DR-MLSAD model. We also design an efficient proximal point dual semismooth Newton (PpdSsn) algorithm for the reformulated equivalent model. In numerical experiments, we compare the DR-MLSAD model with the radius selected by the RWPI approach to the DR-MLSAD model with the radius selected by cross-validation, the sample average approximation (SAA) of the MLSAD model, and the 1/N strategy on the real market datasets. Numerical results show that our model has better out-of-sample performance in most cases. Furthermore, we compare PpdSsn algorithm with first-order algorithms and Gurobi solver on random data. Numerical results verify the effectiveness of PpdSsn in solving large-scale DR-MLSAD problems

Comparação de medidas de risco na otimização de portfólios

Este estudo investiga alternativas à Teoria Moderna de Portfólio de Harry Markowitz, reconhecendo suas limitações em cenários de mercado desafiadores. Focalizamos a análise nas medidas de risco Second Lower Partial Moment (SLPM) e Conditional Value-at-Risk (CVaR) e, em consonância com a preocupação pela aversão a grandes perdas, incorporamos o Maximum Drawdown (MDD). Realizamos uma análise empírica abrangente com ações do Ibovespa no período de 2009 a 2019, comparando diversas estratégias com o Global Minimum Variance Portfolio (GMVP) e o benchmark Equal-Weight Portfolio (EWP). Os resultados destacam que estratégias fundamentadas em SLPM e MDD superaram consistentemente o benchmark em termos de rentabilidade e métricas de avaliação de risco, emergindo como alternativas promissoras para investidores e gestores de portfólio em contextos desafiadores de mercado.This study explores alternatives to Harry Markowitz's Modern Portfolio Theory, recognizing its limitations in challenging market scenarios. We focus our analysis on the risk measures Second Lower Partial Moment (SLPM) and Conditional Value-at-Risk (CVaR) while, in line with the concern for aversion to large losses, we also incorporate the Maximum Drawdown (MDD). Through a comprehensive empirical analysis spanning the period from 2009 to 2019 and involving stocks listed in the Ibovespa index, we rigorously compare various investment strategies with both the Global Minimum Variance Portfolio (GMVP) and the Equal-Weight Portfolio (EWP) benchmark. The results consistently underscore that strategies rooted in SLPM and MDD not only outperformed the benchmark but also demonstrated superior profitability and risk mitigation, thus emerging as highly promising alternatives for investors and portfolio managers seeking resilience and excellence in the face of challenging market conditions