Warwick Business School Financial Econometrics Research Centre
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
