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Optimal long term investment in a jump diffusion setting : a large deviation approach
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Chu, Ba M., Knight, John L. and Satchell, S. (Stephen) (2006) Optimal long term investment in a jump diffusion setting : a large deviation approach. Working Paper. University of Warwick: Warwick Business School Financial Econometrics Research Centre. Working Papers Series, Vol.2006 (No.9).
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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
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) | ||||
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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 |
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Library of Congress Subject Headings (LCSH): | Large deviations, Portfolio management, Risk-return relationships | ||||
Series Name: | Working Papers Series | ||||
Publisher: | Warwick Business School Financial Econometrics Research Centre | ||||
Place of Publication: | University of Warwick | ||||
Official Date: | 2006 | ||||
Dates: |
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Volume: | Vol.2006 | ||||
Number: | No.9 | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) |
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