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Monte-Carlo Estimations of the Downside Risk of Derivative Portfolios

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  • Patrick Leoni

    (Economics Department, National University of Ireland, Maynooth)

Abstract

We simulate the performances of a standard derivatives portfolio to evaluate the relevance of benchmarking in terms of downside risk reduction. The simulation shows that benchmarking always leads to significantly more severe losses in average than those generated by letting the portfolio reach the end of a given horizon. Moreover, switching from a 0-correlation across underlyings to a very mild form of correlation significantly increases the probability of reaching the downside benchmark before maturity, whereas adding more correlation does not significantly increase this figure.

Suggested Citation

  • Patrick Leoni, 2007. "Monte-Carlo Estimations of the Downside Risk of Derivative Portfolios," Economics Department Working Paper Series n1760607, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n1760607
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    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1760607.pdf
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    References listed on IDEAS

    as
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    4. Corwin Joy & Phelim P. Boyle & Ken Seng Tan, 1996. "Quasi-Monte Carlo Methods in Numerical Finance," Management Science, INFORMS, vol. 42(6), pages 926-938, June.
    5. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    6. Robert Jarrow & Feng Zhao, 2006. "Downside Loss Aversion and Portfolio Management," Management Science, INFORMS, vol. 52(4), pages 558-566, April.
    7. Jérôme Detemple & René Garcia & Marcel Rindisbacher, 2005. "Asymptotic Properties of Monte Carlo Estimators of Derivatives," Management Science, INFORMS, vol. 51(11), pages 1657-1675, November.
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    Cited by:

    1. Leoni, Patrick L., 2009. "Downside risk of derivative portfolios with mean-reverting underlyings," Discussion Papers on Economics 2/2009, University of Southern Denmark, Department of Economics.

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    Keywords

    : Derivatives; Portfolio management; Benchmarking; Downside risk; Monte-Carlo simulations.;
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