Can switching between risk measures lead to better portfolio optimization?

Brianna Cain and Ralf Zurbruegg ()
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Ralf Zurbruegg: Business School, University of Adelaide

Journal of Asset Management, 2010, vol. 10, issue 6, No 2, 358-369

Abstract: Abstract This article proposes a technique that involves switching between risk measures in different market environments, to capture the well-documented dynamic nature of risk within a portfolio optimization setting. In-sample results show categorically that switching between various measures, such as CVaR, time-varying (GARCH) variances and simple standard deviations, can lead to a better performance than using any single measure. Using a logistic probability model to determine when to switch between alternatives, out-of -sample results also show positive results. Given that this study only applies a basic switching system, it lends itself to easy application by practitioners through its simplicity, intuitive appeal and computational feasibility.

Keywords: volatility; variance; CvaR; GARCH; model switching; portfolio allocation (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1057/jam.2009.20

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