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Panic-aware portfolio optimization

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  • Josef Zorn

Abstract

This article provides a portfolio optimization approach that takes into account extreme events. By merging a (downside-only) panic copula with the empirical marginal distributions, panic-awareness is attained for the optimization process. This approach includes the likelihood of highly co-dependent asset movements in panic states of the market—as empirically observed during market crashes. Panic-awareness CVaR optimization translates into robust equity portfolios, empirically exemplified for the UK and German stock market.

Suggested Citation

  • Josef Zorn, 2019. "Panic-aware portfolio optimization," Journal of Asset Management, Palgrave Macmillan, vol. 20(2), pages 103-110, March.
    • Handle: RePEc:pal:assmgt:v:20:y:2019:i:2:d:10.1057_s41260-018-00103-3
    DOI: 10.1057/s41260-018-00103-3
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
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    4. Kofman, Paul & Koedijk, Kees & Campbell, Rachel, 2002. "Increased Correlation in Bear markets: A Downside Risk Perspective," CEPR Discussion Papers 3172, C.E.P.R. Discussion Papers.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Panic copula; Portfolio optimization; CVaR; Expected shortfall; Entropy pooling; Panic markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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