Two-sided coherent risk measures and their application in realistic portfolio optimization
By using a different derivation scheme, a new class of two-sided coherent risk measures is constructed in this paper. Different from existing coherent risk measures, both positive and negative deviations from the expected return are considered in the new measure simultaneously but differently. This innovation makes it easy to reasonably describe and control the asymmetry and fat-tail characteristics of the loss distribution and to properly reflect the investor's risk attitude. With its easy computation of the new risk measure, a realistic portfolio selection model is established by taking into account typical market frictions such as taxes, transaction costs, and value constraints. Empirical results demonstrate that our new portfolio selection model can not only suitably reflect the impact of different trading constraints, but find more robust optimal portfolios, which are better than the optimal portfolio obtained under the conditional value-at-risk measure in terms of diversification and typical performance ratios.
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.:
- Clarke, R & Davies, S W, 1983. "Aggregate Concentration, Market Concentration and Diversification," Economic Journal, Royal Economic Society, vol. 93(369), pages 182-92, March.
- Dirk Tasche, 2002. "Expected Shortfall and Beyond," Papers cond-mat/0203558, arXiv.org, revised Oct 2002.
- Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-26, March.
- Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Fischer, T., 2003. "Risk capital allocation by coherent risk measures based on one-sided moments," Insurance: Mathematics and Economics, Elsevier, vol. 32(1), pages 135-146, February.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Quaranta, Anna Grazia & Zaffaroni, Alberto, 2008. "Robust optimization of conditional value at risk and portfolio selection," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2046-2056, October.
- Xiaoqiang Cai & Kok-Lay Teo & Xiaoqi Yang & Xun Yu Zhou, 2000. "Portfolio Optimization Under a Minimax Rule," Management Science, INFORMS, vol. 46(7), pages 957-972, July.
- Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
- Svetlozar Rachev & Sergio Ortobelli & Stoyan Stoyanov & Frank J. Fabozzi & Almira Biglova, 2008. "Desirable Properties Of An Ideal Risk Measure In Portfolio Theory," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 19-54.
- Carlo Acerbi & Dirk Tasche, 2001.
"On the coherence of Expected Shortfall,"
cond-mat/0104295, arXiv.org, revised May 2002.
- Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
- Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
- Rockafellar, R. Tyrrell & Uryasev, Stan & Zabarankin, M., 2007. "Equilibrium with investors using a diversity of deviation measures," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3251-3268, November.
- Farinelli, Simone & Tibiletti, Luisa, 2008. "Sharpe thinking in asset ranking with one-sided measures," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1542-1547, March.
- 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.
- Tasche, Dirk, 2002. "Expected shortfall and beyond," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1519-1533, July.
- R. Rockafellar & Stan Uryasev & Michael Zabarankin, 2006. "Generalized deviations in risk analysis," Finance and Stochastics, Springer, vol. 10(1), pages 51-74, 01.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:32:y:2008:i:12:p:2667-2673. 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: (Shamier, Wendy)
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.