Asymptotic analysis of portfolio diversification

Hengxin Cui, Ken Seng Tan, Fan Yang and Chen Zhou

Insurance: Mathematics and Economics, 2022, vol. 106, issue C, 302-325

Abstract: In this paper, we investigate the optimal portfolio construction aiming at extracting the most diversification benefit. We employ the diversification ratio based on the Value-at-Risk as the measure of the diversification benefit. With modeling the dependence of risk factors by the multivariate regularly variation model, the most diversified portfolio is obtained by optimizing the asymptotic diversification ratio. Theoretically, we show that the asymptotic solution is a good approximation to the finite-level solution. Our theoretical results are supported by extensive numerical examples. By applying our portfolio optimization strategy to real market data, we show that our strategy provides a fast algorithm for handling a large portfolio, while outperforming other peer strategies in out-of-sample risk analyses.

Keywords: Portfolio optimization; Diversification; Risk management; Multivariate regularly variation; Asymptotic analysis (search for similar items in EconPapers)
JEL-codes: C60 G11 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:106:y:2022:i:c:p:302-325

DOI: 10.1016/j.insmatheco.2022.07.010

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