Publication: European Market Portfolio Diversification Strategies across the GFC
Loading...
Files
Official URL
Full text at PDC
Publication Date
2014
Advisors (or tutors)
Editors
Journal Title
Journal ISSN
Volume Title
Publisher
Citations
Exportar
Abstract
This paper features an analysis of the effectiveness of a range of portfolio diversification strategies as applied to a set of daily arithmetically compounded returns on a set of ten market indices representing the major European markets for a nine year period from the beginning of 2005 to the end of 2013. The sample period, which incorporates the periods of both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is challenging one for the application of portfolio investment strategies. The analysis is undertaken via the examination of multiple investment strategies and a variety of hold-out periods and back-tests. We commence by using four two year estimation periods and subsequent one year investment hold out period, to analyse a naive 1/N diversification strategy, and to contrast its effectiveness with Markowitz mean variance analysis with positive weights. Markowitz opimisation is then compared with various down-side investment opimisation strategies. We begin by comparing Markowitz with CVaR, and then proceed to evaluate the relative effectiveness of Markowitz with various draw-down strategies, utilising a series of backtests .Our results suggest that none of the more sophisticated opimisation strategies appear to dominate naive diversification.
Description
Preprint submitted to example: Nuclear Phisics B. 15Th october 2014.
UCM subjects
Unesco subjects
Keywords
Citation
Alexander, G. J., and Baptista, A. M. (2003) CVaR as a measure of Risk: Implications for Portfolio Selection: Working Paper, School of Management, University of Minnesota.
Alexander, S., Coleman, T. F., and Li, Y. (2003) Derivative Portfolio Hedging Based on CVaR. In G. Szego (Ed.), New Risk Measures in Investment and Regulation: John Wiley and Sons Ltd.
Andersson, F., Uryasev, S., Mausser, H., and Rosen, D. (2000) Credit Risk Optimization with Conditional Value-at Risk criterion. Mathematical Programming, 89 (2), 273-291.
Artzner, P., Delbaen, F., Eber, J., and Heath, D. (1999). Coherent Measures of Risk. Mathematical Finance, 9, 203-228.
Barry, C. B. (1974) Portfolio Analysis under Uncertain Means, Variances, and Covariances. Journal of Finance 29: 515-5 22.
Bawa, V. S., S. Brown, and R. Klein, (1979) Estimation Risk and Optimal Portfolio Choice. Amsterdam, The Netherlands: North Holland.
Best, M. J., and R. R. Grauer, (1992) Positively Weighted Minimum-Variance Portfolios and the Structure of Asset Expected Returns. Journal of Financial and Quantitative Analysis 27:513 37.
Chan, L. K. C., J. Karceski, and J. Lakonishok, (1999) On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model. Review of Financial Studies 12:937 74.
Chekhlov A., Uryasev S. and M. Zabarankin, (2000) Portfolio optimization with drawdown constraints. Research Report 2000-5, Department of Industrial and Systems Engineering, University of Florida, Gainesville.
Chekhlov A., Uryasev S. and M. Zabarankin, (2004) Portfolio optimization with drawdown constraints In Supply Chain and Finance (ed. Pardalos P., Migdalas A. and Baourakis G.) vol. 2 of Series on Computers and Operations Research World Scienti c Singapore pp. 209 -228.
Chekhlov A., Uryasev S. and M. Zabarankin, (2005) Drawdown measure in portfolio optimization. International Journal of Theoretical and Applied Finance 8(1), 13 -58.
Choueifaty Y. and Y. Coignard, (2008) Toward maximum diversi fication. Journal of Portfolio Management 34(4), 40- 51.
Choueifaty Y., Froidure T. and J. Reynier, (2011) Properties of the most diversifi ed portfolio. Working paper, TOBAM.
DeMiguel, V., L. Garlappi, and R. Uppal, (2009) Optimal versus naive diversifi cation: How ine fficient is the 1\N portfolio diversifi cation strategy? Review of Financial Studies, 22, 5: 1915-1953.
Ghalanos, A. and B. Pfa, (2014) {parma}: Portfolio Allocation and Risk Management Applications, R package version 1.5-1. (Available at:http://cran.r-project.org/web/packages/PerformanceAnalytics/)
Jagannathan, R., and T. Ma, (2003) Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps. Journal of Finance 58:165-1 84.
James, W., and C. Stein. (1961) Estimation with Quadratic Loss. Proceedings of the 4th Berkeley Symposium on Probability and Statistics 1. Berkeley, CA: University of California Press.
Jobson, J. D., R. Korkie, and V. Ratti, (1979) Improved Estimation for Markowitz Portfolios Using James-Stein Type Estimators. Proceedings of the American Statistical Association 41:279 -292.
Jobson, J. D., and R. Korkie. (1980) Estimation for Markowitz E fficient Portfolios. Journal of the American Statistical Association 75:544 -554.
Jorion, P. (1985) International Portfolio Diversifi cation with Estimation Risk. Journal of Business 58:259 -278.
Jorion, P. (1986) Bayes-Stein Estimation for Portfolio Analysis. Journal of Financial and Quantitative Analysis 21:279 -292.
Ledoit, O., and M. Wolf, (2004) Honey, I Shrunk the Sample Covariance Matrix: Problems in Mean-Variance Optimization. Journal of Portfolio Management 30:110 -119.
Lintner, J. (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics. 47:1, 13 -37.
Markowitz, H. M. 1952. Portfolio Selection. Journal of Finance 7 (1): 77- 91.
Markowitz, H.M. (1959) Portfolio Selection e cient diversi cation of Investments, Cowles Foundation, New York, John Wiley.
Markowitz, H.M. (1991) Foundations of portfolio theory, Journal of Finance, 46, 469 -477.
Merton, R.C. (1972) An analytical derivation of the effi cient frontier. Journal of Financial and Quantitative Analysis 7: 1851-18 72.
Michaud, R.O. (1989) The Markowitz Optimization Enigma: Is 'Optimized' optimal? Financial Analysts Journal, January/February 1989, 45 (1): 31-42
Mossin, Jan. (1966) Equilibrium in a Capital Asset Market. Econometrica. October, 35, 768 -783.
Pastor, L. (2000) Portfolio Selection and Asset Pricing Models. Journal of Finance 55:179 -223.
Pastor, L., and R. F. Stambaugh, (2000) Comparing Asset Pricing Models: An Investment Perspective. Journal of Financial Economics 56: 335-3 81.
Pfaff, B. (2013) Financial Risk Modelling and Portfolio Optimisation with R, Wiley, Chichester, UK.
Pflug, G. (2000) Some Remarks on Value-at-Risk and Conditional-Value-at-Risk. In R. Uryasev (Ed.), Probabilistic Constrained Optimisation: Methodology and Applications. Dordrecht, Boston: Kluwer Academic Publishers.
Rockafellar, R. T., and S. Uryasev, (2002) Conditional Value-at-Risk for General Loss Distributions. Journal of Banking and Finance, 26(7), 1443-1471.
Rockafellar, R. T., Uryasev, S., and M. Zabarankin, (2006, a). Master Funds in Portfolio Analysis with General Deviation Measures. Journal of Banking and Finance, 30(2), 743-776.
Rockafellar, R.T., S. Uryasev, and M. Zabarankin, (2006, b) Optimality conditions in portfolio analysis with general deviation measures, Mathematical Programming 108, 515 -540.
Rockafellar, R.T., S. Uryasev, and M. Zabarankin, (2007) Equilibrium with investors using a diversity of deviation measures, Journal of Banking & Finance 31 3251 -3268.
Roy, A.D. (1952) Econometrica Vol. 20, 3, 431-449.
Sharpe, W. F. (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance. 19:3, pp. 425 -442.
Treynor, J. L. (1962) Toward a Theory of Market Value of Risky Assets. Unpublished manuscript. Final version in Asset Pricing and Portfolio Performance, (1999), Robert A. Korajczyk, ed., London: Risk Books, pp. 15- 22.
Uryasev, S., and R.T. Rockafellar, (2000) Optimisation of Conditional Value-at-Risk. Journal of Risk, 2(3), 21-41.
Zabarankinm M, K. Pavlikov, and S. Uryasev, (2014) Capital Asset Pricing Model (CAPM) with drawdown measure, European Journal of Operational Research, 234, 508-517.