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Portfolio diversification and value at risk under thick-tailedness

Author

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  • Rustam Ibragimov

Abstract

This paper focuses on the study of portfolio diversification and value at risk analysis under heavy-tailedness. We use a notion of diversification based on majorization theory that will be explained in the text. The paper shows that the stylized fact that portfolio diversification is preferable is reversed for extremely heavy-tailed risks or returns. However, the stylized facts on diversification are robust to heavy-tailedness of risks or returns as long as their distributions are moderately heavy-tailed. Extensions of the results to the case of dependence, including convolutions of α-symmetric distributions and models with common shocks are provided.

Suggested Citation

  • Rustam Ibragimov, 2009. "Portfolio diversification and value at risk under thick-tailedness," Quantitative Finance, Taylor & Francis Journals, vol. 9(5), pages 565-580.
    • Handle: RePEc:taf:quantf:v:9:y:2009:i:5:p:565-580
    DOI: 10.1080/14697680802629384
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