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Dynamic equity asset allocation with liquidity-adjusted market risk criterion: Appraisal of efficient and coherent portfolios

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  • Mazin A M Al Janabi

    (Faculty of Business and Economics, United Arab Emirates University)

Abstract

This article extends research literature related to the evaluation of modern portfolio risk management techniques by providing a broad modeling of dynamic equity asset allocation under the supposition of illiquid and adverse market settings. This study analyzes, from a fund manager's perspective, the performance of liquidity adjusted risk modeling in obtaining efficient and coherent equity trading portfolios subject to realistic operational constraints as specified by the fund manager. Specifically, the article proposes a re-engineered and robust approach to equity optimal portfolio selection, in a Liquidity-Adjusted Value at Risk (L-VaR) framework, and particularly from the perspective of trading portfolios that have both long and short trading positions or for trading portfolios that consists merely of long positions. Moreover, in this article, the authors develop a dynamic portfolio selection model and an optimization algorithm that allocates equity assets by minimizing L-VaR subject to the constraints that the expected return, trading volume and liquidation horizon should meet the budget limits set by the fund manager.

Suggested Citation

  • Mazin A M Al Janabi, 2011. "Dynamic equity asset allocation with liquidity-adjusted market risk criterion: Appraisal of efficient and coherent portfolios," Journal of Asset Management, Palgrave Macmillan, vol. 12(6), pages 378-394, December.
    • Handle: RePEc:pal:assmgt:v:12:y:2011:i:6:d:10.1057_jam.2010.28
    DOI: 10.1057/jam.2010.28
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    References listed on IDEAS

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    1. Yiu, K. F. C., 2004. "Optimal portfolios under a value-at-risk constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1317-1334, April.
    2. Mazin A.M. Al Janabi, 2007. "On the use of value at risk for managing foreign-exchange exposure in large portfolios," Journal of Risk Finance, Emerald Group Publishing, vol. 8(3), pages 260-287, May.
    3. Campbell, Rachel & Huisman, Ronald & Koedijk, Kees, 2001. "Optimal portfolio selection in a Value-at-Risk framework," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1789-1804, September.
    4. Alexander, Gordon J. & Baptista, Alexandre M., 2008. "Active portfolio management with benchmarking: Adding a value-at-risk constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 779-820, March.
    5. Jorion, Philippe, 1991. "Bayesian and CAPM estimators of the means: Implications for portfolio selection," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 717-727, June.
    6. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
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    Cited by:

    1. Al Janabi, Mazin A.M., 2014. "Optimal and investable portfolios: An empirical analysis with scenario optimization algorithms under crisis market prospects," Economic Modelling, Elsevier, vol. 40(C), pages 369-381.
    2. Chui-Chun Tsai & Tsun-Siou Lee, 2017. "Liquidity-Adjusted Value-at-Risk for TWSE Leverage/ Inverse ETFs: A Hellinger Distance Measure Research," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 13(1), pages 53-81, February.

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