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Coherent measure of portfolio risk

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  • Ardakani, Omid M.

Abstract

This study introduces a multivariate entropic Value at Risk (mEVaR) risk measure, broadening the conventional Value at Risk scope to a multi-asset scenario. The mEVaR is coherent and encapsulates the integrated risk of various assets in a portfolio. In addition, a new theoretical result incorporates mutual information into the mEVaR to capture tail dependence during extreme market events. The findings suggest that greater mutual dependence among assets increases risk as the benefit of diversification decreases. Examples, simulations, and empirical studies illustrate the applicability of these risk measures as tools for managing and optimizing investment portfolios.

Suggested Citation

  • Ardakani, Omid M., 2023. "Coherent measure of portfolio risk," Finance Research Letters, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finlet:v:57:y:2023:i:c:s1544612323005949
    DOI: 10.1016/j.frl.2023.104222
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    References listed on IDEAS

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    1. Zou, Zhenfeng & Wu, Qinyu & Xia, Zichao & Hu, Taizhong, 2023. "Adjusted Rényi entropic Value-at-Risk," European Journal of Operational Research, Elsevier, vol. 306(1), pages 255-268.
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    Cited by:

    1. Ardakani, Omid M., 2023. "Capturing information in extreme events," Economics Letters, Elsevier, vol. 231(C).

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    More about this item

    Keywords

    Entropic Value at Risk; Multivariate analysis; Mutual information; Risk management; Uncertainty;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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