Hedging crash risk in optimal portfolio selection

Shushang Zhu, Wei Zhu, Xi Pei and Xueting Cui

Journal of Banking & Finance, 2020, vol. 119, issue C

Abstract: When almost all underlying assets suddenly lose a certain part of their nominal value in a market crash, the diversification effect of portfolios in a normal market condition no longer works. We integrate the crash risk into portfolio management and investigate performance measures, hedging and optimization of portfolio selection involving derivatives. A suitable convex conic programming framework based on parametric approximation method is proposed to make the problem a tractable one. Simulation analysis and empirical study are performed to test the proposed approach.

Keywords: Crash risk; Normal risk; Hedged portfolio; Greeks; Semidefinite programming (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301710

DOI: 10.1016/j.jbankfin.2020.105905

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