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Portfolio risk management in a data-rich environment

  • Mohammed Bouaddi


  • Abderrahim Taamouti


We study risk assessment using an optimal portfolio in which the weights are functions of latent factors and firm-specific characteristics (hereafter, diffusion index portfolio). The factors are used to summarize the information contained in a large set of economic data and thus reflect the state of the economy. First, we evaluate the performance of the diffusion index portfolio and compare it to both that of a portfolio in which the weights depend only on firm-specific characteristics and an equally weighted portfolio. We then use value-at-risk, expected shortfall, and downside probability to investigate whether the weights-modeling approach, which is based on factor analysis, helps reduce market risk. Our empirical results clearly indicate that using economic factors together with firm-specific characteristics helps protect investors against market risk. Copyright Swiss Society for Financial Market Research 2012

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Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 26 (2012)
Issue (Month): 4 (December)
Pages: 469-494

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Handle: RePEc:kap:fmktpm:v:26:y:2012:i:4:p:469-494
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