Portfolio Construction Based on Implied Correlation Information and Value at Risk

Jesus Rogel - Salazar () and Roberto Tella
Additional contact information
Jesus Rogel - Salazar: University of Hertfordshire
Roberto Tella: Group Finance Treasury

EconoQuantum, Revista de Economia y Finanzas, 2015, vol. 12, issue 1, 125-144

Abstract: Value at Risk (VaR) is a commonly used downside-risk measure giving the worst-case asset loss over a target horizon for a given confidence level. Implied correlation from VaR is an alternative form of the correlation coefficient calculated not only based on historic performance, but taking into account a forecast of the worst-loss. Given its importance, here we present a treatment that is accessible to undergraduate students in economics, finance and similar areas with the aim of familiarising the reader with this risk measure. With the use of three case studies we analyse the effect that implied correlation from VaR has on portfolios of increasing asset size. The VaR of each asset is calculated as well as a mean implied correlation, ρ, which is used to adjust the original portfolio’s invested fractions in order to view the shift in risk and return. We track comparative portfolios over a 50-day period to identify trends between portfolio type and risk encountered.

Keywords: Implied correlation; Value at Risk; VaR; Portfolio construction; Risk. (search for similar items in EconPapers)
JEL-codes: C60 D81 G11 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
http://econoquantum.cucea.udg.mx/index.php/EQ/article/view/4856 (application/pdf)
http://econoquantum.cucea.udg.mx/index.php/EQ/issue/view/429

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:qua:journl:v:12:y:2015:i:1:p:125-144

Access Statistics for this article

EconoQuantum, Revista de Economia y Finanzas is currently edited by Isai Guizar Mateos

More articles in EconoQuantum, Revista de Economia y Finanzas from Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia. Contact information at EDIRC.
Bibliographic data for series maintained by Sandra Ivett Portugal Padilla ().