Risk minimization through portfolio replication

S. Ciliberti () and M. Mézard

The European Physical Journal B: Condensed Matter and Complex Systems, 2007, vol. 57, issue 2, 175-180

Abstract: We use a replica approach to deal with portfolio optimization problems. A given risk measure is minimized using empirical estimates of asset values correlations. We study the phase transition which happens when the time series is too short with respect to the size of the portfolio. We also study the noise sensitivity of portfolio allocation when this transition is approached. We consider explicitely the cases where the absolute deviation and the conditional value-at-risk are chosen as a risk measure. We show how the replica method can study a wide range of risk measures, and deal with various types of time series correlations, including realistic ones with volatility clustering. Copyright EDP Sciences/Società Italiana di Fisica/Springer-Verlag 2007

Keywords: 89.65.Gh Economics; econophysics, financial markets, business and management, (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (17)

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DOI: 10.1140/epjb/e2007-00130-7

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