Portfolio Diversification Effects and Regular Variation in Financial Data
AbstractPortfolio risk is in an important way driven by 'abnormal' returns emanating from heavy tailed distributed asset returns. The theory of regular variation and extreme values provides a model for this feature of financial data. We first review this theory and subsequently study the problem of portfolio diversification in particular. We show that if the portfolio asset return distributions are regulary varying at infinity, then Feller's convolution theorem implies that the portfolio diversification is more effective than if the underlying distribution would be normal. This is illustrated by a simulation study and an application to S&P stock returns. Published in 'Allgemeines Statistisches Archiv' (2002) 86, 69-82.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-070/2.
Date of creation: 19 Jul 2001
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-09-10 (All new papers)
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- Chen Zou, 2009. "Dependence structure of risk factors and diversification effects," DNB Working Papers, Netherlands Central Bank, Research Department 219, Netherlands Central Bank, Research Department.
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