Portfolio Selection with Heavy Tails

Namwon Hyung and Casper de Vries
Additional contact information
Namwon Hyung: Seoul City University

No 05-009/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Consider the portfolio problem of choosing the mix between stocks and bonds under a downside risk constraint. Typically stock returns exhibit fatter tails than bonds corresponding to their greater downside risk. Downside risk criteria like the safety first criterion therefore often select corner solutions in the sense of a bonds only portfolio. This is due to a focus on the asymptotically dominating first order Pareto term of the portfolio return distribution. We show that if second order terms are taken into account, a balanced solution emerges. The theory is applied to empirical examples from the literature.

This discussion paper has resulted in a publication in the Journal of Empirical Finance , 2007, 14(3).

Keywords: safety first; heavy tails; portfolio diversification (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2005-01-17, Revised 2006-10-04
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/05009.pdf (application/pdf)

Related works:
Journal Article: Portfolio selection with heavy tails (2007)
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:tin:wpaper:20050009

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().