The returns and risks of investment portfolio in stock market crashes

Jiang-Cheng Li, Chao Long and Xiao-Dan Chen

Physica A: Statistical Mechanics and its Applications, 2015, vol. 427, issue C, 282-288

Abstract: The returns and risks of investment portfolio in stock market crashes are investigated by considering a theoretical model, based on a modified Heston model with a cubic nonlinearity, proposed by Spagnolo and Valenti. Through numerically simulating probability density function of returns and the mean escape time of the model, the results indicate that: (i) the maximum stability of returns is associated with the maximum dispersion of investment portfolio and an optimal stop-loss position; (ii) the maximum risks are related with a worst dispersion of investment portfolio and the risks of investment portfolio are enhanced by increasing stop-loss position. In addition, the good agreements between the theoretical result and real market data are found in the behaviors of the probability density function and the mean escape time.

Keywords: Financial markets; Heston model; Investment portfolio; The mean escape time; Returns and risks (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:427:y:2015:i:c:p:282-288

DOI: 10.1016/j.physa.2015.02.018

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