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Diversification benefits of risk portfolio models: a case of Taiwan’s stock market

Author

Listed:
  • Jing-Rung Yu

    (National Chi-Nan University)

  • Wan-Jiun Paul Chiou

    (Northeastern University)

  • Jian-Hong Yang

    (National Chi-Nan University)

Abstract

How to construct effective investment strategies is a core issue for modern finance. In this paper, we investigate the benefits of various models by rebalancing portfolios using the daily stock return data in Taiwan. We further consider investment constraints in portfolios to ensure the feasibility of their applications. Using five performance criteria, we find the risk models, particularly the CVaR, yield higher ex ante and ex post performance than a naïve buy-and-hold portfolio. The two-stage regressions show that high return benefits are associated with a bear market while high reduction in risk is positively related to high volatility. Though VaR is regarded as a standard model applied in the real world, our findings suggest that CVaR can serve as a good alternative.

Suggested Citation

  • Jing-Rung Yu & Wan-Jiun Paul Chiou & Jian-Hong Yang, 2017. "Diversification benefits of risk portfolio models: a case of Taiwan’s stock market," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 467-502, February.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:2:d:10.1007_s11156-016-0558-0
    DOI: 10.1007/s11156-016-0558-0
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    More about this item

    Keywords

    Diversification benefits; Risk modeling; VaR; CVaR;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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