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Alternative risk premia: contagion and portfolio choice

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  • Bernd Scherer

    (EDHEC Business School)

Abstract

Portfolio managers regard contagion as the death of diversification. The simultaneous jump to worst decile returns for most investments in a portfolio is hard to offset by diversification alone. Our results find substantial contagion across ARP strategies, which is difficult to predict. We derive the optimal asset allocation for an ARP portfolio under contagion risk and show that the investor’s best defence is to take less portfolio leverage. In addition, he should shy away from assets that perform poorly in contagion states.

Suggested Citation

  • Bernd Scherer, 2020. "Alternative risk premia: contagion and portfolio choice," Journal of Asset Management, Palgrave Macmillan, vol. 21(3), pages 178-191, May.
    • Handle: RePEc:pal:assmgt:v:21:y:2020:i:3:d:10.1057_s41260-020-00158-1
    DOI: 10.1057/s41260-020-00158-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Alternative risk premium; Portfolio choice; Contagion; Tail risk; Logit regression;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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