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The Downside Risk of Heavy Tails induces Low Diversification

Author

Listed:
  • Namwon Hyung

    (University of Seoul)

  • Casper G. de Vries

    (Erasmus University Rotterdam)

Abstract

Actual portfolios contain fewer stocks than are implied by standard financial analysis that balances the costs of diversification against the benefits in terms of the standard deviation of the returns. Suppose a safety first investor cares about downside risk and recognizes the heavytail feature of the asset return distributions. Then we show that optimal portfolio sizes are smaller than traditional correlation based diversificationanalysis suggests.

Suggested Citation

  • Namwon Hyung & Casper G. de Vries, 2010. "The Downside Risk of Heavy Tails induces Low Diversification," Tinbergen Institute Discussion Papers 10-082/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20100082
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    References listed on IDEAS

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    Cited by:

    1. Hyung, Namwon & de Vries, Casper G., 2012. "Simulating and calibrating diversification against black swans," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1162-1175.

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    More about this item

    Keywords

    Portfolio diversification; downside risk; heavy tails;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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