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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, Finance and Accounting Department Working Paper Series n1760607, Department of Economics, Finance and Accounting, 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

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    1. Boyle, Phelim & Broadie, Mark & Glasserman, Paul, 1997. "Monte Carlo methods for security pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1267-1321, June.
    2. Jérôme Detemple & René Garcia & Marcel Rindisbacher, 2005. "Asymptotic Properties of Monte Carlo Estimators of Derivatives," Management Science, INFORMS, pages 1657-1675.
    3. Jun Liu & Francis A. Longstaff & Jun Pan, 2003. "Dynamic Asset Allocation with Event Risk," Journal of Finance, American Finance Association, vol. 58(1), pages 231-259, February.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    5. Suleyman Basak & Alex Shapiro & Lucie Teplá, 2006. "Risk Management with Benchmarking," Management Science, INFORMS, pages 542-557.
    6. Ning Du & David V. Budescu, 2005. "The Effects of Imprecise Probabilities and Outcomes in Evaluating Investment Options," Management Science, INFORMS, pages 1791-1803.
    7. Corwin Joy & Phelim P. Boyle & Ken Seng Tan, 1996. "Quasi-Monte Carlo Methods in Numerical Finance," Management Science, INFORMS, pages 926-938.
    8. Robert Jarrow & Feng Zhao, 2006. "Downside Loss Aversion and Portfolio Management," Management Science, INFORMS, pages 558-566.
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    Cited by:

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

    More about this item

    Keywords

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

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