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Comparing downside risk measures for heavy tailed distributions

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  • Danielsson, Jon
  • Jorgensen, Bjorn N.
  • Sarma, Mandira
  • de Vries, Casper G.

Abstract

Using regular variation to define heavy tailed distributions, we show that prominent downside risk measures produce similar and consistent ranking of heavy tailed risk. Thus regardless of the particular risk measure being used, assets will be ranked in a similar and consistent manner for heavy tailed assets.
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Suggested Citation

  • Danielsson, Jon & Jorgensen, Bjorn N. & Sarma, Mandira & de Vries, Casper G., 2006. "Comparing downside risk measures for heavy tailed distributions," Economics Letters, Elsevier, vol. 92(2), pages 202-208, August.
  • Handle: RePEc:eee:ecolet:v:92:y:2006:i:2:p:202-208
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    References listed on IDEAS

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    2. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
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    5. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters,in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78 World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. repec:eee:finlet:v:24:y:2018:i:c:p:289-290 is not listed on IDEAS
    2. Gregory-Allen, Russell & Lu, Helen & Stork, Philip, 2012. "Asymmetric extreme tails and prospective utility of momentum returns," Economics Letters, Elsevier, vol. 117(1), pages 295-297.
    3. Luiz Felix & Roman Kraussl & Philip Stork, 2016. "Single Stock Call Options as Lottery Tickets - Overpricing and Investor Sentiment," Tinbergen Institute Discussion Papers 16-022/IV, Tinbergen Institute, revised 26 Jan 2018.
    4. Felix, Luiz & Kräussl, Roman & Stork, Philip, 2017. "Single stock call options as lottery tickets," CFS Working Paper Series 566, Center for Financial Studies (CFS).
    5. Antonio Di Cesare & Philip A. Stork & Casper G. de Vries, 2015. "Risk Measures for Autocorrelated Hedge Fund Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 13(4), pages 868-895.
    6. Adam, Alexandre & Houkari, Mohamed & Laurent, Jean-Paul, 2008. "Spectral risk measures and portfolio selection," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1870-1882, September.
    7. Danielsson, Jon & Zhou, Chen, 2015. "Why risk is so hard to measure," LSE Research Online Documents on Economics 62002, London School of Economics and Political Science, LSE Library.
    8. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
    9. Gonzalo, J. & Olmo, J., 2007. "The impact of heavy tails and comovements in downside-risk diversification," Working Papers 07/02, Department of Economics, City University London.
    10. Pais, Amelia & Stork, Philip A., 2011. "Contagion risk in the Australian banking and property sectors," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 681-697, March.
    11. Tavakoli Baghdadabad, Mohammad Reza, 2014. "Average drawdown risk reduction and risk tolerances," Research in Economics, Elsevier, vol. 68(3), pages 264-276.
    12. Tarasov, Arthur, 2011. "Coherent Quantitative Analysis of Risks in Agribusiness: Case of Ukraine," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 3(4), December.
    13. Nieto, Maria Rosa & Ruiz, Esther, 2016. "Frontiers in VaR forecasting and backtesting," International Journal of Forecasting, Elsevier, vol. 32(2), pages 475-501.
    14. Tee, Kai-Hong, 2009. "The effect of downside risk reduction on UK equity portfolios included with Managed Futures Funds," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 303-310, December.
    15. 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.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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