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Optimal Portfolio Selection and Risk Management: A Comparison between the Stable Paretian Approach and the Gaussian One

In: Handbook of Computational and Numerical Methods in Finance

Author

Listed:
  • Sergio Ortobelli

    (University of Bergamo, Department MSIA)

  • Svetlozar Rachev

    (Universität Karlsruhe, Institut für Statistik und Mathematische Wirtschaftstheorie
    University of California, Department of Statistics and Applied Probability)

  • Isabella Huber

    (Universität Karlsruhe, Institut für Statistik und Mathematische Wirtschaftstheorie)

  • Almira Biglova

    (Universität Karlsruhe, Institut für Statistik und Mathematische Wirtschaftstheorie
    Ufa State Aviation Technical University)

Abstract

This paper analyzes stable Paretian models in portfolio theory, risk management and option pricing theory. Firstly, we examine investor’s optimal choices when we assume respectively either Gaussian or stable non-Gaussian distributed index returns. Thus, we approximate discrete time optimal allocations assuming different distributional assumptions and considering several term structure scenarios. Secondly, we compare some stable approaches to compute VaR for heavy-tailed return series. These models are subject to backtesting on out-of-sample data in order to assess their forecasting power. Finally, when asset prices are log-stable distributed, we propose a numerical valuation of option prices and we describe and compare delta hedging strategies when asset prices are either log-stable distributed or log-normal distributed.

Suggested Citation

  • Sergio Ortobelli & Svetlozar Rachev & Isabella Huber & Almira Biglova, 2004. "Optimal Portfolio Selection and Risk Management: A Comparison between the Stable Paretian Approach and the Gaussian One," Springer Books, in: Svetlozar T. Rachev (ed.), Handbook of Computational and Numerical Methods in Finance, chapter 6, pages 197-252, Springer.
    • Handle: RePEc:spr:sprchp:978-0-8176-8180-7_6
    DOI: 10.1007/978-0-8176-8180-7_6
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