IDEAS home Printed from https://ideas.repec.org/p/fth/harver/2116.html
   My bibliography  Save this paper

Portfolio Diversification Under Local, Moderate and Global Deviations From Power Laws

Author

Listed:
  • Rustam Ibragimov
  • Johan Walden

Abstract

This paper focuses on the analysis of portfolio diversification for a wide class of nonlinear transformations of heavy-tailed risks. We show that diversification of a portfolio of nonlinear transformations of thick-tailed risks increases riskiness if expectations of these functions are infinite. In addition, coherency of the value at risk measure is always violated for such portfolios. On the contrary, for nonlinearly transformed heavy-tailed risks with finite expectations, the stylized fact that diversification is preferable continues to hold. Moreover, in the latter setting, the value of risk is a coherent measure of risk. The framework of transformations of long-tailed random variables includes many models with Pareto-type distributions that exhibit local, moderate and global deviations from power tails in the form of additional slowly varying or exponential factors. This leads to a refined understanding of under what distributional assumptions diversification increases riskiness.

Suggested Citation

  • Rustam Ibragimov & Johan Walden, 2006. "Portfolio Diversification Under Local, Moderate and Global Deviations From Power Laws," Harvard Institute of Economic Research Working Papers 2116, Harvard - Institute of Economic Research.
    • Handle: RePEc:fth:harver:2116
    as

    Download full text from publisher

    File URL: http://www.economics.harvard.edu/pub/hier/2006/HIER2116.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rustam Ibragimov & Johan Walden, 2011. "Value at risk and efficiency under dependence and heavy-tailedness: models with common shocks," Annals of Finance, Springer, vol. 7(3), pages 285-318, August.
    2. Chen Zou, 2009. "Dependence structure of risk factors and diversification effects," DNB Working Papers 219, Netherlands Central Bank, Research Department.
    3. Embrechts, Paul & Puccetti, Giovanni, 2010. "Bounds for the sum of dependent risks having overlapping marginals," Journal of Multivariate Analysis, Elsevier, vol. 101(1), pages 177-190, January.
    4. Zhou, Chen, 2010. "Dependence structure of risk factors and diversification effects," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 531-540, June.
    5. Walden, Johan & Ibragimov, Rustam, 2008. "Portfolio Diversification under Local and Moderate Deviations from Power Laws," Scholarly Articles 2640586, Harvard University Department of Economics.
    6. Kyle Moore & Pengfei Sun & Casper de Vries & Chen Zhou, 2013. "Shape Homogeneity and Scale Heterogeneity of Downside Tail Risk," Working Papers 13-13, Chapman University, Economic Science Institute.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fth:harver:2116. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/ieharus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.