Downside risk of derivative portfolios with mean-reverting underlyings
AbstractWe carry out a Monte-Carlo simulation of a standard portfolio management strategy involving derivatives, to estimate the sensitivity of its downside risk to a change of mean-reversion of the underlyings. We find that the higher the intensity of mean-reversion, the lower the probability of reaching a pre-determined loss level. This phenomenon appears of large statistical significance for large enough loss levels. We also find that the higher the mean-reversion intensity of the underlyings, the longer the expected time to reach those loss levels. The simulations suggest that selecting underlyings with high mean-reversion effect is a natural way to reduce the downside risk of those widely traded assets.
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Bibliographic InfoPaper provided by Department of Business and Economics, University of Southern Denmark in its series Discussion Papers of Business and Economics with number 2/2009.
Length: 18 pages
Date of creation: 02 Jan 2009
Date of revision:
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Postal: Department of Business and Economics, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
Phone: 65 50 32 33
Fax: 65 50 32 37
Web page: http://www.sdu.dk/ivoe
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Monte Carlo simulation; mean-reverting underlyings;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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CEPR Discussion Papers
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