Second Order Risk
AbstractManaging a portfolio to a risk model can tilt the portfolio toward weaknesses of the model. As a result, the optimized portfolio acquires downside exposure to uncertainty in the model itself, what we call "second order risk." We propose a risk measure that accounts for this bias. Studies of real portfolios, in asset-by-asset and factor model contexts, demonstrate that second order risk contributes significantly to realized volatility, and that the proposed measure accurately forecasts the out-of-sample behavior of optimized portfolios.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0908.2455.
Date of creation: Aug 2009
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Web page: http://arxiv.org/
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Model uncertainty and portfolio management
by Economic Logician in Economic Logic on 2009-10-29 14:38:00
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