Portfolio Selection under Systemic Risk

Lin, Weidong, Olmo, Jose and Taamouti, Abderrahim ORCID: 0000-0002-1360-8803
(2023) Portfolio Selection under Systemic Risk. JOURNAL OF MONEY CREDIT AND BANKING.

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<jats:title>Abstract</jats:title><jats:p>This paper proposes a modified Sharpe ratio to construct optimal portfolios under systemic events. The portfolio allocation problem is solved analytically under the absence of short‐selling restrictions and numerically when short‐selling restrictions are imposed. This approach is made operational by embedding it in a multivariate dynamic setting using dynamic conditional correlation and copula models. We evaluate the out‐of‐sample performance of our portfolio empirically over the period 2007 to 2020 using <jats:italic>ex post</jats:italic> final wealth paths and systemic risk metrics against mean–variance, equally weighted, and global minimum variance portfolios. Our portfolio outperforms all competitors under market distress and remains competitive in noncrisis periods.</jats:p>

Item Type: Article
Additional Information: Source info: Journal of Money, Credit and Banking, Forthcoming
Uncontrolled Keywords: conditional tail risk, conditional volatility models, portfolio allocation, Sharpe ratio, systemic risk
Divisions: Faculty of Humanities and Social Sciences > School of Management
Depositing User: Symplectic Admin
Date Deposited: 01 Feb 2023 09:21
Last Modified: 21 Aug 2023 02:59
DOI: 10.1111/jmcb.13038
Related URLs:
URI: https://livrepository.liverpool.ac.uk/id/eprint/3168049