Simulating and calibrating diversification against black swans

Namwon Hyung and Casper de Vries

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 8, 1162-1175

Abstract: An investor concerned with the downside risk of a black swan only needs a small portfolio to reap the benefits from diversification. This matches actual portfolio sizes, but does contrast with received wisdom from mean–variance analysis and intuition regarding fat tailed distributed returns. The concern for downside risk and the fat tail property of the distribution of returns can explain the low portfolio diversification. A simulation and calibration study is used to demonstrate the relevance of the theory and to disentangle the relative importance of the different effects.

Keywords: Portfolio diversification; Downside risk; Heavy tails; Calibration (search for similar items in EconPapers)
JEL-codes: C2 C6 G0 G1 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:8:p:1162-1175

DOI: 10.1016/j.jedc.2012.03.007

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