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The optimal portfolio in respect to Expected Shortfall: a comparative study

Author

Listed:
  • Henryk Gurgul

    (AGH University of Science and Technology, Department of Applications of Mathematics in Economics)

  • Artur Machno

    (AGH University of Science and Technology, Department of Applications of Mathematics in Economics)

  • Robert Syrek

    (Jagiellonian University)

Abstract

Value at Risk plays a crucial role in the risk management. However, this risk measure has some drawbacks. The alternative risk measure is Expected Shortfall, which is rarely used, but exhibits desirable properties. In the paper, the estimation of both risk measures has been conducted, for pairs of index returns (DJIA, DAX, ATX), based on Markowitz model, the regime switching copula model and the multivariate GARCH model. The results suggest that a misspecification can cause many errors. Incorrect models cause bias of mean, especially models which do not as- sume dynamic structure of the market Both an underestimation and an overestimation of a risk has been observed. In the paper, it is shown that the measure of change in Expected Shortfall as a function of the expected return is strongly underestimated under the normal distribution assumption.

Suggested Citation

  • Henryk Gurgul & Artur Machno & Robert Syrek, 2013. "The optimal portfolio in respect to Expected Shortfall: a comparative study," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 14, pages 17-38.
    • Handle: RePEc:agh:journl:v:14:y:2013:p:17-38
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    File URL: https://journals.agh.edu.pl/manage/article/view/992/787
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