Sensitivity of portfolio VaR and CVaR to portfolio return characteristics

Risk management through marginal rebalancing is important for institutional investors due to the size of their portfolios.

Author(s):

Stoyan V. Stoyanov

Head of Research, EDHEC Risk InstituteAsia

Svetlozar T. Rachev

Professor of Quantitative Finance,Stony Brook University

Frank J. Fabozzi

Professor of Finance, EDHEC Business SchoolMember of EDHEC-Risk Institute

We consider the problem of marginally improving portfolio VaR and CVaR through a marginal change in the portfolio return characteristics. We study the relative significance of standard deviation, mean, tail thickness, and skewness in a parametric setting assuming a Student's t or a stable distribution for portfolio returns. We also carry out an empirical study with the constituents of DAX30, CAC40, and SMI. Our analysis leads to practical implications for institutional investors and regulators.

Type: Working paper
Date: le 13/01/2012
Research Cluster : Finance

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