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Estimation and Decomposition of Downside Risk for Portfolios with Non-normal Returns

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  • Boudt, Kris
  • Peterson, B.
  • Croux, Christophe
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    Abstract

    We propose a new estimator for Expected Shortfall that uses asymptotic expansions to account for the asymmetry and heavy tails in financial returns. We provide all the necessary formulas for decomposing estimators of Value at Risk and Expected Shortfall based on asymptotic expansions and show that this new methodology is very useful for analyzing and predicting the risk properties of portfolios of alternative investments.

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    File URL: https://lirias.kuleuven.be/bitstream/123456789/200168/1/JORpaper.pdf
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    Bibliographic Info

    Paper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/200168.

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    Date of creation: 2008
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    Publication status: Published in The Journal of Risk (2008) v.11, p.79-103
    Handle: RePEc:ner:leuven:urn:hdl:123456789/200168

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    Web page: http://www.kuleuven.be

    Related research

    Keywords: Alternative investments; Component expected shortfall; Cornish-Fisher expansion; Downside risk; Expected shortfall; Portfolio; Risk contribution; Value at risk;

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    1. Peter Christoffersen & Sílvia Gonçalves, 2004. "Estimation Risk in Financial Risk Management," CIRANO Working Papers 2004s-15, CIRANO.
    2. Keith Kuester & Stefan Mittnik & Marc S. Paolella, 2006. "Value-at-Risk Prediction: A Comparison of Alternative Strategies," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(1), pages 53-89.
    3. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    4. Pierre Giot and S»bastien Laurent, 2001. "Value-At-Risk For Long And Short Trading Positions," Computing in Economics and Finance 2001 94, Society for Computational Economics.
    5. Eric Jondeau & Michael Rockinger, 2006. "Optimal Portfolio Allocation under Higher Moments," European Financial Management, European Financial Management Association, vol. 12(1), pages 29-55.
    6. Boudt, Kris & Peterson, Brian & Carl, Peter, 2008. "Hedge fund portfolio selection with modified expected shortfall," MPRA Paper 7126, University Library of Munich, Germany.
    7. Winfried G. Hallerbach, 1999. "Decomposing Portfolio Value-at-Risk: A General Analysis," Tinbergen Institute Discussion Papers 99-034/2, Tinbergen Institute.
    8. Baillie, Richard T. & Bollerslev, Tim, 1992. "Prediction in dynamic models with time-dependent conditional variances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 91-113.
    9. Khan, Jafar A. & Van Aelst, Stefan & Zamar, Ruben H., 2007. "Robust Linear Model Selection Based on Least Angle Regression," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 1289-1299, December.
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