An analysis of portfolio selection with background risk

Chonghui Jiang, Yongkai Ma and Yunbi An

Journal of Banking & Finance, 2010, vol. 34, issue 12, 3055-3060

Abstract: This paper investigates the impact of background risk on an investor's portfolio choice in a mean-variance framework, and analyzes the properties of efficient portfolios as well as the investor's hedging behaviour in the presence of background risk. Our model implies that the efficient portfolio with background risk can be separated into two independent components: the traditional mean-variance efficient portfolio, and a self-financing component constructed to hedge against background risk. Our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape. Moreover, both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors, including the proportion of background assets in total wealth and the correlation between background risk and financial risk.

Keywords: Background; risk; Portfolio; selection; Mean-variance; analysis (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00271-2
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:12:p:3055-3060

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().