Simulating and calibrating diversification against black swans
An investor concerned with the downside risk of a black swan only needs a small portfolio to reap the benefits from diversification. This matches actual portfolio sizes, but does contrast with received wisdom from mean–variance analysis and intuition regarding fat tailed distributed returns. The concern for downside risk and the fat tail property of the distribution of returns can explain the low portfolio diversification. A simulation and calibration study is used to demonstrate the relevance of the theory and to disentangle the relative importance of the different effects.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arzac, Enrique R. & Bawa, Vijay S., 1977. "Portfolio choice and equilibrium in capital markets with safety-first investors," Journal of Financial Economics, Elsevier, vol. 4(3), pages 277-288, May.
- Rustam Ibragimov, 2009. "Portfolio diversification and value at risk under thick-tailedness," Quantitative Finance, Taylor & Francis Journals, vol. 9(5), pages 565-580.
- Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
- Jansen, Dennis W & de Vries, Casper G, 1991.
"On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective,"
The Review of Economics and Statistics,
MIT Press, vol. 73(1), pages 18-24, February.
- Dennis W. Jansen & Casper de Vries, 1988. "On the frequency of large stock returns: putting booms and busts into perspective," Working Papers 1989-006, Federal Reserve Bank of St. Louis.
- Campbell, Rachel A. & Kräussl, Roman, 2006.
"Revisiting the home bias puzzle: Downside equity risk,"
CFS Working Paper Series
2006/31, Center for Financial Studies (CFS).
- Campbell, Rachel A. & Kraussl, Roman, 2007. "Revisiting the home bias puzzle: Downside equity risk," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1239-1260, November.
- Christian Gourieroux & J. P. Laurent & Olivier Scaillet, 2000.
"Sensitivity Analysis of Values at Risk,"
Econometric Society World Congress 2000 Contributed Papers
0162, Econometric Society.
- C. Gourieroux & J.P. Laurent & O. Scaillet, 2000. "Sensitivity analysis of values at risk," THEMA Working Papers 2000-04, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Christian Gourieroux & Jean-Paul Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Working Papers 2000-05, Centre de Recherche en Economie et Statistique.
- Gouriéroux, Christian & Laurent, J.P. & Scaillet, Olivier, 1999. "Sensitivity Analysis of Values at Risk," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jan 2000.
- Kan, Raymond & Zhou, Guofu, 2007. "Optimal Portfolio Choice with Parameter Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(03), pages 621-656, September.
- Statman, Meir, 1987. "How Many Stocks Make a Diversified Portfolio?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 353-363, September.
- John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000.
"Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk,"
NBER Working Papers
7590, National Bureau of Economic Research, Inc.
- John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02.
- Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
- Tang, Gordon Y. N., 2004. "How efficient is naive portfolio diversification? an educational note," Omega, Elsevier, vol. 32(2), pages 155-160, April.
- Elton, Edwin J & Gruber, Martin J, 1977. "Risk Reduction and Portfolio Size: An Analytical Solution," The Journal of Business, University of Chicago Press, vol. 50(4), pages 415-37, October.
- Jansen, Dennis W. & Koedijk, Kees G. & de Vries, Casper G., 2000. "Portfolio selection with limited downside risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 247-269, November.
- Dale L. Domian & David A. Louton & Marie D. Racine, 2007. "Diversification in Portfolios of Individual Stocks: 100 Stocks Are Not Enough," The Financial Review, Eastern Finance Association, vol. 42(4), pages 557-570, November.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:36:y:2012:i:8:p:1162-1175. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.