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Simulating and calibrating diversification against black swans

  • Hyung, Namwon
  • de Vries, Casper G.

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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 8 ()
Pages: 1162-1175

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:8:p:1162-1175
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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