Simulating and calibrating diversification against black swans

Namwon Hyung, Casper G. de Vries

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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.

Original languageEnglish
Pages (from-to)1162-1175
Number of pages14
JournalJournal of Economic Dynamics and Control
Volume36
Issue number8
DOIs
StatePublished - Aug 2012

Keywords

  • Calibration
  • Downside risk
  • Heavy tails
  • Portfolio diversification

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