Simulating and calibrating diversification against black swans
AbstractAn investor concerned with the downside risk of a black swan only needs a small portfolio to reap the benefits from diversification. This matches actual portfolio sizes, but does contrast with received wisdom from mean–variance analysis and intuition regarding fat tailed distributed returns. The concern for downside risk and the fat tail property of the distribution of returns can explain the low portfolio diversification. A simulation and calibration study is used to demonstrate the relevance of the theory and to disentangle the relative importance of the different effects.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 36 (2012)
Issue (Month): 8 ()
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Web page: http://www.elsevier.com/locate/jedc
Portfolio diversification; Downside risk; Heavy tails; Calibration;
Find related papers by JEL classification:
- G0 - Financial Economics - - General
- G1 - Financial Economics - - General Financial Markets
- C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
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