Optimal investment and asymmetric risk for a large portfolio: a large deviations approach
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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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
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 of Pages:||61|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
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