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Two-sided coherent risk measures and their application in realistic portfolio optimization

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  • Chen, Zhiping
  • Wang, Yi
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    Abstract

    By using a different derivation scheme, a new class of two-sided coherent risk measures is constructed in this paper. Different from existing coherent risk measures, both positive and negative deviations from the expected return are considered in the new measure simultaneously but differently. This innovation makes it easy to reasonably describe and control the asymmetry and fat-tail characteristics of the loss distribution and to properly reflect the investor's risk attitude. With its easy computation of the new risk measure, a realistic portfolio selection model is established by taking into account typical market frictions such as taxes, transaction costs, and value constraints. Empirical results demonstrate that our new portfolio selection model can not only suitably reflect the impact of different trading constraints, but find more robust optimal portfolios, which are better than the optimal portfolio obtained under the conditional value-at-risk measure in terms of diversification and typical performance ratios.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 12 (December)
    Pages: 2667-2673

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:12:p:2667-2673

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Finance Risk management Coherent risk measures Conditional value-at-risk Market frictions Portfolio optimization Performance ratios;

    References

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    Cited by:
    1. Balbás, Alejandro & Balbás, Beatriz & Balbás, Raquel, 2010. "CAPM and APT-like models with risk measures," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1166-1174, June.
    2. Chen, Zhiping & Yang, Li, 2011. "Nonlinearly weighted convex risk measure and its application," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1777-1793, July.
    3. Brandouy, Olivier & Briec, Walter & Kerstens, Kristiaan, 2008. "Portfolio performance gauging in discrete time using a Luenberger productivity indicator," Working Papers 2008/60, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    4. Chen, Zhi-ping & Li, Gang & Guo, Ju-e, 2013. "Optimal investment policy in the time consistent mean–variance formulation," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 145-156.
    5. Marco Corazza & Giovanni Fasano & Riccardo Gusso, 2011. "Particle Swarm Optimization with non-smooth penalty reformulation for a complex portfolio selection problem," Working Papers 2011_10, Department of Economics, University of Venice "Ca' Foscari".
    6. You, Leyuan & Daigler, Robert T., 2010. "Is international diversification really beneficial?," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 163-173, January.

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