IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v46y2022ipbs1544612321004104.html
   My bibliography  Save this article

Optimized portfolio using a forward-looking expected tail loss

Author

Listed:
  • Sanford, Anthony

Abstract

In this paper, I construct an optimal portfolio by minimizing the expected tail loss derived from the forward-looking natural distribution of the Recovery Theorem. This natural distribution can be used as the criterion function in an expected tail loss portfolio optimization problem. I find that the portfolio constructed using the Recovery Theorem outperforms both an equally-weighted portfolio and a portfolio constructed using historical expected tail loss. The portfolio constructed using the Recovery Theorem has the smallest historical tail loss, smallest maximum drawdown, highest Sortino Ratio, and highest Sharpe Ratio.

Suggested Citation

  • Sanford, Anthony, 2022. "Optimized portfolio using a forward-looking expected tail loss," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004104
    DOI: 10.1016/j.frl.2021.102421
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612321004104
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2021.102421?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gordon J. Alexander & Alexandre M. Baptista, 2004. "A Comparison of VaR and CVaR Constraints on Portfolio Selection with the Mean-Variance Model," Management Science, INFORMS, vol. 50(9), pages 1261-1273, September.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. Sun, Yufei & Aw, Grace & Teo, Kok Lay & Zhu, Yanjian & Wang, Xiangyu, 2016. "Multi-period portfolio optimization under probabilistic risk measure," Finance Research Letters, Elsevier, vol. 18(C), pages 60-66.
    4. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
    5. Steve Ross, 2015. "The Recovery Theorem," Journal of Finance, American Finance Association, vol. 70(2), pages 615-648, April.
    6. Canina, Linda & Figlewski, Stephen, 1993. "The Informational Content of Implied Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 659-681.
    7. Han, Yingwei & Li, Ping & Xia, Yong, 2017. "Dynamic robust portfolio selection with copulas," Finance Research Letters, Elsevier, vol. 21(C), pages 190-200.
    8. Tasche, Dirk, 2002. "Expected shortfall and beyond," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1519-1533, July.
    9. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    10. Sara Cecchetti & Laura Sigalotti, 2013. "Forward-looking robust portfolio selection," Temi di discussione (Economic working papers) 913, Bank of Italy, Economic Research and International Relations Area.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yuta Hibiki & Takuya Kiriu & Norio Hibiki, 2024. "Optimal Currency Portfolio with Implied Return Distribution in the Mean-Variance Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(2), pages 251-283, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcelo Brutti Righi & Paulo Sergio Ceretta, 2015. "Shortfall Deviation Risk: An alternative to risk measurement," Papers 1501.02007, arXiv.org, revised May 2016.
    2. Wolfgang Kürsten & Mario Brandtner, 2009. "Kohärente Risikomessung versus individuelle Akzeptanzmengen — Anmerkungen zum impliziten Risikoverständnis des “Conditional Value-at-Risk”," Schmalenbach Journal of Business Research, Springer, vol. 61(4), pages 358-381, June.
    3. Dominique Guegan & Bertrand K Hassani, 2014. "Distortion Risk Measures or the Transformation of Unimodal Distributions into Multimodal Functions," Documents de travail du Centre d'Economie de la Sorbonne 14008, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Zheyao Pan, 2018. "A state‐price volatility index for the U.S. government bond market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 573-597, November.
    5. Sahamkhadam, Maziar & Stephan, Andreas & Östermark, Ralf, 2018. "Portfolio optimization based on GARCH-EVT-Copula forecasting models," International Journal of Forecasting, Elsevier, vol. 34(3), pages 497-506.
    6. Szego, Giorgio, 2005. "Measures of risk," European Journal of Operational Research, Elsevier, vol. 163(1), pages 5-19, May.
    7. Su, Xiaoshan & Li, Yuhan, 2024. "Robust portfolio selection with subjective risk aversion under dependence uncertainty," Economic Modelling, Elsevier, vol. 132(C).
    8. Su, Xiaoshan & Bai, Manying & Han, Yingwei, 2021. "Robust portfolio selection with regime switching and asymmetric dependence," Economic Modelling, Elsevier, vol. 99(C).
    9. Strub, Moris S. & Li, Duan & Cui, Xiangyu & Gao, Jianjun, 2019. "Discrete-time mean-CVaR portfolio selection and time-consistency induced term structure of the CVaR," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    10. Al Janabi, Mazin A.M. & Arreola Hernandez, Jose & Berger, Theo & Nguyen, Duc Khuong, 2017. "Multivariate dependence and portfolio optimization algorithms under illiquid market scenarios," European Journal of Operational Research, Elsevier, vol. 259(3), pages 1121-1131.
    11. Bodnar Taras & Schmid Wolfgang & Zabolotskyy Tara, 2012. "Minimum VaR and minimum CVaR optimal portfolios: Estimators, confidence regions, and tests," Statistics & Risk Modeling, De Gruyter, vol. 29(4), pages 281-314, November.
    12. Mario Brandtner, 2016. "Spektrale Risikomaße: Konzeption, betriebswirtschaftliche Anwendungen und Fallstricke," Management Review Quarterly, Springer, vol. 66(2), pages 75-115, April.
    13. Akhtaruzzaman, Md & Banerjee, Ameet Kumar & Boubaker, Sabri & Moussa, Faten, 2023. "Does green improve portfolio optimisation?," Energy Economics, Elsevier, vol. 124(C).
    14. Dominique Guegan & Bertrand Hassani, 2014. "Distortion Risk Measures or the Transformation of Unimodal Distributions into Multimodal Functions," Post-Print halshs-00969242, HAL.
    15. Víctor M. Adame-García & Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero, "undated". "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," Documentos de Trabajo del ICAE 2015-07, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Jun 2015.
    16. Wong, Wing-Keung & Phoon, Kok Fai & Lean, Hooi Hooi, 2008. "Stochastic dominance analysis of Asian hedge funds," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 204-223, June.
    17. Jiang, Chun-Fu & Peng, Hong-Yi & Yang, Yu-Kuan, 2016. "Tail variance of portfolio under generalized Laplace distribution," Applied Mathematics and Computation, Elsevier, vol. 282(C), pages 187-203.
    18. Víctor Adame-García & Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero, 2017. "“Resolution of optimization problems and construction of efficient portfolios: An application to the Euro Stoxx 50 index"," IREA Working Papers 201702, University of Barcelona, Research Institute of Applied Economics, revised Feb 2017.
    19. Fulga, Cristinca, 2016. "Portfolio optimization with disutility-based risk measure," European Journal of Operational Research, Elsevier, vol. 251(2), pages 541-553.
    20. Gao, Jianjun & Xiong, Yan & Li, Duan, 2016. "Dynamic mean-risk portfolio selection with multiple risk measures in continuous-time," European Journal of Operational Research, Elsevier, vol. 249(2), pages 647-656.

    More about this item

    Keywords

    Recovery theorem; Portfolio theory; Expected tail loss; Expected shortfall; Portfolio optimization;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004104. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.