Limited Downside Risk In Portfolio Selection Among U.S. and Pacific Basin Equities

Dennis Jansen

International Economic Journal, 2001, vol. 15, issue 4, 1-39

Abstract: In this paper we domostrate safety first portfolio selection using extreme value theory.We show that Roy's safety first criterion can be improved on by exploiting the fat tail property of asset returns. Using daily data for a set of international stock indices for the period 1986-May 2000, we calculate the so-called tail indexes, which are accurate measures of the fat-tailedness of the stock return distributions, and use these to calculate minimum threshold return levels given very low exceedence probabilities for investors. This example is but one way that the theory of extremes can be utilized in economics and finance. [G11]

Date: 2001
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DOI: 10.1080/10168730100000049

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