Diversification Quotients: Quantifying Diversification via Risk Measures
Liyuan Lin and
Papers from arXiv.org
To overcome several limitations of existing diversification indices, we introduce the diversification quotient (DQ). Defined through a parametric family of risk measures, DQ satisfies three natural properties, namely, non-negativity, location invariance and scale invariance, which are shown to be conflicting for any traditional diversification index based on a single risk measure. We pay special attention to the two most important classes of risk measures in banking and insurance, the Value-at-Risk (VaR) and the Expected Shortfall (ES, also called CVaR). DQs based on VaR and ES enjoy many convenient technical properties, and they are efficient to optimize in portfolio selection. By analyzing the popular multivariate models of elliptical and regular varying distributions, we find that DQ can properly capture tail heaviness and common shocks which are neglected by traditional diversification indices. When illustrated with financial data, DQ is intuitive to interpret, and its performance is competitive when contrasted with other diversification methods in portfolio optimization.
Date: 2022-06, Revised 2022-07
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://arxiv.org/pdf/2206.13679 Latest version (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2206.13679
Access Statistics for this paper
More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().