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Limited Downside Risk In Portfolio Selection Among U.S. and Pacific Basin Equities

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  • W. Jansen Dennis

Abstract

In this paper we domostrate safety first portfolio selection using extreme value theory.We show that Roy's safety first criterion can be improved on by exploiting the fat tail property of asset returns. Using daily data for a set of international stock indices for the period 1986-May 2000, we calculate the so-called tail indexes, which are accurate measures of the fat-tailedness of the stock return distributions, and use these to calculate minimum threshold return levels given very low exceedence probabilities for investors. This example is but one way that the theory of extremes can be utilized in economics and finance. [G11]

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 15 (2001)
Issue (Month): 4 ()
Pages: 1-39

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Handle: RePEc:taf:intecj:v:15:y:2001:i:4:p:1-39

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Cited by:
  1. Chen Zou, 2009. "Dependence structure of risk factors and diversification effects," DNB Working Papers 219, Netherlands Central Bank, Research Department.
  2. Zhou, Chen, 2010. "Dependence structure of risk factors and diversification effects," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 531-540, June.
  3. DiTraglia, Francis J. & Gerlach, Jeffrey R., 2013. "Portfolio selection: An extreme value approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 305-323.

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