Chu, Ba M., Knight, John L. and Satchell, S. (Stephen) (2005) Optimal investment and asymmetric risk for a large portfolio: a large deviations approach. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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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.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Portfolio management, Edgeworth expansions, Information asymmetry, Risk perception, Nonlinear theories
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	3 September 2005
Number:	No.06-
Number of Pages:	61
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/1762

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