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How does a change in downside risk affect optimal demand for a risky asset?: Comparative statics on Tail Conditional Expectation

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  • Nakamura, Kazuki

Abstract

This paper explains how changes in the return distribution of a risky asset, which alters Tail Conditional Expectation (TCE), impact the agent’s portfolio selection. We establish sufficient conditions for distribution changes, leading to a TCE reduction, to increase optimal demand for the risky asset. These results imply that risk-averse agents may increase their optimal demand for the risky asset when the downside risk premium increases. Furthermore, evaluating TCE, or downside risk premium, is compatible with second-degree stochastic dominance. This suggests that such an order of downside risk measures can provide additional insight into an agent’s portfolio selection, as identified by the stochastic dominance criteria.

Suggested Citation

  • Nakamura, Kazuki, 2023. "How does a change in downside risk affect optimal demand for a risky asset?: Comparative statics on Tail Conditional Expectation," Finance Research Letters, Elsevier, vol. 58(PD).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010401
    DOI: 10.1016/j.frl.2023.104668
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    References listed on IDEAS

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    More about this item

    Keywords

    Portfolio theory; Tail conditional expectation; Value at risk; Stochastic dominance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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