Down-Side Risk Metrics as Portfolio Diversification Strategies across the Global Financial Crisis

Allen, David E.; McAleer, Michael; Powell, Robert; Singh, Abhay Kumar

doi:10.3390/jrfm9020006

Cited by 13 publications

(12 citation statements)

References 61 publications

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“…All in all, the results of our analysis are not consistent with those presented in and Allen et al (2014A); although these are in line with those of Kirby and Ostdiek (2012) and Allen et al (2014b) for the hedge fund indices. Thus, although as in all empirical works the results obtained have to be taken with some degree of caution (since they are refered to a particular index over a certain time period), our findings lead us to infer that the naive strategy of 1/N can provide a good results during some episodes, being always exceeded by several portfolio optimization models.…”

Section: Discussionsupporting

confidence: 49%

“…The 1/N strategy has proved as a difficult alternative to beat, demonstrating the practical difficulties to obtain an efficient portfolio And Allen et al, 2014a.). Therefore, we propose an efficiency analysis of the various methodologies compared with the naive diversification of 1/N and the main Spanish stock index, Ibex 35.…”

Section: Compared the Cvar And Conditionalmentioning

confidence: 99%

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Portfolios in the Ibex 35 Index: Alternative Methods to the Traditional Framework, a Comparative with the Naive Diversification in a Pre- and Post- Crisis Context

2015

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In this paper, we present an analysis of the effectiveness of various portfolio optimization strategies Simón Sosvilla-RiveroComplutense University of Madrid sosvilla@ccee.ucm.es Abstract:In this paper, we present an analysis of the effectiveness of various portfolio optimization strategies applied to the stocks included in the Spanish Ibex 35 index, for a period of 14 years, from 2001 until 2014. The period under study includes episodes of volatility and instability in financial markets, incorporating the Global Financial Crisis and the European Sovereign Debt Crisis. This implies a challenge in portfolio optimization strategies since the methodologies are restricted to the assignment of positive weights. We have taken for asset allocation the daily returns with an estimation window equal to 1 year and we hold portfolio assets for another year. This paper attempts to influence the discussion over whether the naive diversification proves to be an effective strategy as opposed to portfolio optimization models. For that, we evaluate the out-of-sample performance of 15 strategies for asset allocation in the Ibex 35 index, before and after of the Global Financial Crisis. Our results suggest that a large number of strategies outperform to the 1/N rule and to the Ibex 35 index in terms of return, Sharpe ratio and lower VaR and CVaR. The mean-variance portfolio of Markowitz with shortsale constraints, it is the only strategy that renders a Sharpe ratio statistically different to Ibex 35 index in the

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Section: Discussionsupporting

confidence: 49%

Section: Compared the Cvar And Conditionalmentioning

confidence: 99%

Portfolios in the Ibex 35 Index: Alternative Methods to the Traditional Framework, a Comparative with the Naive Diversification in a Pre- and Post- Crisis Context

2015

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“…However, Basel Accord outlined three methods for computing the minimum capital charge for operational risk in a series of rising sophistication and risk sensitivity. Allen et al (2016) this study aimed to analyze the range effectiveness of portfolio diversification strategies, concentrating on down-side risk metrics, as a portfolio diversification strategy in a European market context. Thus, the results suggested that none of the more sophisticated optimization strategies appear to dominate naive diversification.…”

Section: Operational Risk Identification and Measurementmentioning

confidence: 99%

Operational Risk Management in Financial Institutions: An Overview

Aloqab

Alobaidi

Raweh

2018

BER

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After the 2008 financial crisis, many attributed the crisis due to the inability of financial risks to manage operational risks. The period during and after 2008 was critical in providing insight on how vital operational risk management is essential to financial institutions and how best these risks can be managed. The study begins with an overview of the concept of risk and BASEL I, II and III and how they apply to financial institutions. Further, the paper discusses the growing need for operational risk management in the context of financial institutions taking into considerations various models and approaches used in the management of financial risks. Moreover, several pieces of literature discussed operational risks in the financial institutions. The paper also looks at the various methods of operational risk identification and management before concluding that for better management of operational risks in banks, there is the need to comply with both the national and international regulations and procedures.

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“…On the other hand, [34] develop a new VaR model based on financial markets overnight information. The ES is also used as risk measure for portfolio diversification strategy purposes [35] and for hedging purposes [36]. In any case, the use of ES poses a challenge to portfolio and risk managers because it is not clear which validation method the regulator and the industry should employ to test the proposed risk measure, that is, it is not clear how to evaluate the goodness of the ES risk measure.…”

Section: Literature Reviewmentioning

confidence: 99%

Quantifying Risk in Traditional Energy and Sustainable Investments

2019

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These days we are witnessing a deep change in the characteristics of the type of energy that our economies are supplied with. A clear trend is that sustainable and green energies are decisively replacing traditional fossil fuel-based sources of energy. For various reasons, this fundamental change implies an increasing risk in investments on portfolios heavily based on traditional energy industries. What is less known, is that these industries have returns that show a very low correlation with sustainable fossil fuel-free stock portfolios making them an appealing tool for portfolio managers to design properly diversified investments. In this study we examine this and related phenomena proposing statistical methods to implement the expected shortfall (ES), the challenging risk measure recently adopted by the financial regulator. We obtain evidence that a newly proposed backtesting procedure for the ES based on multinomial tests is an adequate and simple method to validate these risk measures when applied to a highly volatile stock index. Backtesting results of the ES show that flexible heavy-tailed distribution α–stable performs well for modelling the loss distribution. These results are even improved when the variances of fossil fuel price returns are included as external regressors in the GARCH model variance equation. In this case, the ES computed from the four considered loss distributions perform properly.

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Down-Side Risk Metrics as Portfolio Diversification Strategies across the Global Financial Crisis

Cited by 13 publications

References 61 publications

Portfolios in the Ibex 35 Index: Alternative Methods to the Traditional Framework, a Comparative with the Naive Diversification in a Pre- and Post- Crisis Context

Portfolios in the Ibex 35 Index: Alternative Methods to the Traditional Framework, a Comparative with the Naive Diversification in a Pre- and Post- Crisis Context

Operational Risk Management in Financial Institutions: An Overview

Quantifying Risk in Traditional Energy and Sustainable Investments

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