The economic value of controlling for large losses in portfolio selection

Alexandra Dias

Journal of Banking & Finance, 2016, vol. 72, issue S, S81-S91

Abstract: Research on asset pricing has shown that investor preferences include asymmetry and tail heaviness which affects the composition of optimal portfolios. This article investigates the out-of-sample economic value of introducing the risk of very large losses in portfolio selection. We combine mean–variance analysis with conditional Value-at-Risk using the subadditivity property of conditional Value-at-Risk, and we introduce a two stage method that preserves diversification while controlling for large losses. We find that strategies that account both for variance and the probability of large losses outperform efficient mean–variance portfolios, during and after the global financial crisis.

Keywords: Portfolio selection; Portfolio tail probability; Conditional Value-at-Risk; Risk management (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:72:y:2016:i:s:p:s81-s91

DOI: 10.1016/j.jbankfin.2016.04.016

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