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Minimizing shortfall

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  • Lisa R. Goldberg
  • Michael Y. Hayes
  • Ola Mahmoud

Abstract

This paper describes an empirical study of shortfall optimization using Barra fundamental factors. We compare minimum shortfall to minimum variance portfolios in the US, UK, and Japanese equity markets using Barra Style Factors (Value, Growth, Momentum, etc.). We show that minimizing shortfall generally improves performance over minimizing variance, especially during down-markets, over the period 1985-2010. The outperformance of shortfall is due to intuitive tilts towards protective factors like Value, and away from aggressive factors like Growth and Momentum. The outperformance is largest for the shortfall that measures overall asymmetry rather than the extreme losses.

Suggested Citation

  • Lisa R. Goldberg & Michael Y. Hayes & Ola Mahmoud, 2013. "Minimizing shortfall," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1533-1545, October.
  • Handle: RePEc:taf:quantf:v:13:y:2013:i:10:p:1533-1545
    DOI: 10.1080/14697688.2012.734633
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Bertsimas, Dimitris & Lauprete, Geoffrey J. & Samarov, Alexander, 2004. "Shortfall as a risk measure: properties, optimization and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1353-1381, April.
    3. Angelo Barbieri & Vladislav Dubikovsky & Alexei Gladkevich & Lisa Goldberg & Michael Hayes, 2010. "Central limits and financial risk," Quantitative Finance, Taylor & Francis Journals, vol. 10(10), pages 1091-1097.
    4. Carlo Acerbi & Dirk Tasche, 2002. "Expected Shortfall: A Natural Coherent Alternative to Value at Risk," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(2), pages 379-388, July.
    5. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    6. Kondor, Imre & Pafka, Szilard & Nagy, Gabor, 2007. "Noise sensitivity of portfolio selection under various risk measures," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1545-1573, May.
    7. Hans Föllmer & Alexander Schied, 2002. "Convex measures of risk and trading constraints," Finance and Stochastics, Springer, vol. 6(4), pages 429-447.
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    Cited by:

    1. Oliver Janke, 2016. "Utility Maximization and Indifference Value under Risk and Information Constraints for a Market with a Change Point," Papers 1610.08644, arXiv.org.
    2. Lisa R. Goldberg & Ola Mahmoud, 2014. "Drawdown: From Practice to Theory and Back Again," Papers 1404.7493, arXiv.org, revised Sep 2016.
    3. Cesarone, Francesco & Mango, Fabiomassimo & Mottura, Carlo Domenico & Ricci, Jacopo Maria & Tardella, Fabio, 2020. "On the stability of portfolio selection models," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 210-234.
    4. J. Bohn, 2015. "Financial Modeling, Actuarial Valuation and Solvency in Insurance," Quantitative Finance, Taylor & Francis Journals, vol. 15(5), pages 735-740, May.

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