Empirical estimator of diversification quotient

Xia Han, Liyuan Lin and Mengshi Zhao

Papers from arXiv.org

Abstract: The Diversification Quotient (DQ), introduced by Han et al. (2025), is a recently proposed measure of portfolio diversification that quantifies the reduction in a portfolio's risk-level parameter attributable to diversification. Grounded in a rigorous theoretical framework, DQ effectively captures heavy tails, common shocks, and enhances efficiency in portfolio optimization. This paper further explores the convergence properties and asymptotic normality of empirical DQ estimators based on Value at Risk (VaR) and Expected Shortfall (ES), with explicit calculation of the asymptotic variance. In contrast to the diversification ratio (DR) proposed by Tasche (2007), which may exhibit diverging asymptotic variance due to its lack of location invariance, the DQ estimators demonstrate greater robustness under various distributional settings. We further verify their asymptotic properties under elliptical distributions through simulation, and construct confidence intervals for DQ estimates using AR-GARCH models with a residual-based bootstrap on real financial data. These results establish a solid statistical foundation for applying DQ in financial risk management and decision-making.

Date: 2025-06, Revised 2025-10
New Economics Papers: this item is included in nep-ecm and nep-rmg
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