How the Risk Measures Play Important Roles for Tail Risk Management and Diversification PDF Download

Author: Takuo Higashide
Publisher:
ISBN:
Category :
Languages : en
Pages : 38

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Book Description
In the world of investment, the subject of building a portfolio concerning tail risk is still one of the frequently discussed subjects and unquestionably vital for investors. This paper seeks to examine how the risk measures, lower tail-dependence based on the copulas approach and Conditional Value-at-Risk (CVaR), affect the portfolio strategies and play important roles for tail risk management and diversify the portfolio. By using these two risk measures mentioned above, two different types of risk-based portfolios are proposed that consider for the tail risks: 1) Minimum-lower tail-dependence portfolio (RMTP) and 2) Risk Parity Portfolio based on Conditional Value-at-Risk (CRPP). The simulation results showed how those two risk-based portfolios, RMTP and CRPP, work effectively in multi-asset allocation framework with 6 assets: stocks and sovereign bonds of Japan, United States and Germany, based on the monthly rebalance rule, using 2004-2018 sample period. One of the key findings were that both RMTP and CRPP strategies delivered better performances compared with the traditional portfolio strategies in terms of sharp ratio: 1) RMTP yielded 0.92 and 2) CRPP yielded 0.99 (by adding an appropriate risk reduction to this portfolio, the sharp ratio went up to 1.76). In addition, both of these two strategies also worked effectively in terms of the average of maximum monthly drawdown related to the effect of the tail risk: 1) RMTP by 1.80% and 2) CRPP by 1.74% (by adding an appropriate risk reduction to this portfolio, maximum drawdown decreased to 0.78%). Furthermore, this paper also studies an enhancement strategy based on Risk Parity Portfolios (RPP) focusing on and using co-integration relationship (co-integration approach). According to the simulation result, this proposed enhancement strategy has a potential to yield roughly 4.5% return. Finally, this paper presents the explicit derivation of lower tail-dependence and co-integration approach.

Author: Vineer Bhansali
Publisher: McGraw Hill Professional
ISBN: 0071791760
Category : Business & Economics
Languages : en
Pages : 272

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Book Description
"TAIL RISKS" originate from the failure of mean reversion and the idealized bell curve of asset returns, which assumes that highly probable outcomes occur near the center of the curve and that unlikely occurrences, good and bad, happen rarely, if at all, at either "tail" of the curve. Ever since the global financial crisis, protecting investments against these severe tail events has become a priority for investors and money managers, but it is something Vineer Bhansali and his team at PIMCO have been doing for over a decade. In one of the first comprehensive and rigorous books ever written on tail risk hedging, he lays out a systematic approach to protecting portfolios from, and potentially benefiting from, rare yet severe market outcomes. Tail Risk Hedging is built on the author's practical experience applying macroeconomic forecasting and quantitative modeling techniques across asset markets. Using empirical data and charts, he explains the consequences of diversification failure in tail events and how to manage portfolios when this happens. He provides an easy-to-use, yet rigorous framework for protecting investment portfolios against tail risk and using tail hedging to play offense. Tail Risk Hedging explores how to: Generate profits from volatility and illiquidity during tail-risk events in equity and credit markets Buy attractively priced tail hedges that add value to a portfolio and quantify basis risk Interpret the psychology of investors in option pricing and portfolio construction Customize explicit hedges for retirement investments Hedge risk factors such as duration risk and inflation risk Managing tail risk is today's most significant development in risk management, and this thorough guide helps you access every aspect of it. With the time-tested and mathematically rigorous strategies described here, including pieces of computer code, you get access to insights to help mitigate portfolio losses in significant downturns, create explosive liquidity while unhedged participants are forced to sell, and create more aggressive yet tail-risk-focused portfolios. The book also gives you a unique, higher level view of how tail risk is related to investing in alternatives, and of derivatives such as zerocost collars and variance swaps. Volatility and tail risks are here to stay, and so should your clients' wealth when you use Tail Risk Hedging for managing portfolios. PRAISE FOR TAIL RISK HEDGING: "Managing, mitigating, and even exploiting the risk of bad times are the most important concerns in investments. Bhansali puts tail risk hedging and tail risk management under a microscope--pricing, implementation, and showing how we can fine-tune our risk exposures, which are all crucial ways in how we can better weather our bad times." -- ANDREW ANG, Ann F. Kaplan Professor of Business at Columbia University "This book is critical and accessible reading for fiduciaries, financial consultants and investors interested in both theoretical foundations and practical considerations for how to frame hedging downside risk in portfolios. It is a tremendous resource for anyone involved in asset allocation today." -- CHRISTOPHER C. GECZY, Ph.D., Academic Director, Wharton Wealth Management Initiative and Adj. Associate Professor of Finance, The Wharton School "Bhansali's book demonstrates how tail risk hedging can work, be concretely implemented, and lead to higher returns so that it is possible to have your cake and eat it too! A must read for the savvy investor." -- DIDIER SORNETTE, Professor on the Chair of Entrepreneurial Risks, ETH Zurich

Author: Ron S. Dembo
Publisher: Wiley
ISBN: 9780471247364
Category : Business & Economics
Languages : en
Pages : 272

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Book Description
In high-stakes investing and business, success or failure largely depends on how well you play the game of risk-a game in which the rules of competition are constantly being rewritten. Strategies that proved effective in the past are no longer enough to win today. The key to success is not to rely on yesterday's news, but to peer into the future and ask what could happen tomorrow. Presenting a bold new way of thinking about risk, in Seeing Tomorrow Ron Dembo and Andrew Freeman offer a dynamic framework designed to enhance our ability to make important decisions, and consequently change how we manage our investments. By incorporating investors' individual circumstances and tolerances -as well as the unique reasoning behind their decision making-this innovative approach captures much more of how we actually think about risk. From the basic building blocks required for forward-looking risk management, Dembo and Freeman define and explore the roles and significance of such fundamentals as time horizons, risk measures, benchmarks, and scenarios. Once the foundation is laid, these elements are used to construct a solid architecture for risk management and risk-adjusted analysis that is not only general enough to be able to handle a multitude of risks, but also able to present many different measures of risk. With clear-cut explanations and intriguing real-world examples, Seeing Tomorrow leads you step by step through the authors' groundbreaking risk rules. These include: choosing an appropriate time horizon, selecting scenarios, computing Value at Risk (VAR), assessing both the upside and downside of a potential deal, calculating Regret, and compiling a reliable Regret matrix. By combining Regret, Upside, and a measure of our tolerance for risk, the authors demonstrate how these components create a powerful new way of approaching decisions. They offer guidance on very specific real life problems-such as buying a house or suing someone-as well as on broad matters of strategy and investing. Written by two leading authorities in the field, Seeing Tomorrow is a milestone addition to risk literature that will dramatically alter the way you view, identify, and manage risk. It is must reading for investors and decision makers alike. "Seeing Tomorrow is a powerhouse in the understanding of risk. With their ingenious blend of psychology and rigorous quantitative analysis, the authors have created an authoritative and innovative handbook of risk management that is essential for both practitioners and theoreticians." -Peter L. Bernstein author, Against the Gods and Capital Ideas. "This excellent and readable book provides an innovative approach to choosing actions when the outcomes are uncertain. Anyone with an interest in improving their decision-making skills would benefit from reading this. Anyone with a professional interest in risk management must read it." -Stephen A. Ross Fischer Black Visiting Professor of Finance Massachusetts Institute of Technology Sloan School of Management Sterling Professor of Economics and Finance, Yale University. "Ron Dembo and Andrew Freeman have done an excellent job of describing how to think about and measure risk. This will become required reading for businesses and personal investment executives." -Ned C. Lautenbach.

Author: Pranay Gupta
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
Constructing a multi-asset portfolio with a constraint of tail risk aversion is challenging because (1) the individual asset classes have poor tail risk characteristics and (2) diversification between asset classes is minimal. A better portfolio can be achieved using a multi-strategy framework for the allocation process, whereby different methods of asset and risk allocation co-exist as independent strategies within the same portfolio. This framework creates strategy diversification, allows allocation to be done at multiple investment horizons, and helps to manage tail risk of the portfolio.Conventional tail risk measures, which use only the end-of-horizon return distribution, fail to capture the real risk that an asset owner has of intra-horizon drawdown. Thus, a tail risk measure that is a composite of intra-horizon and end-of-horizon risk should lead to a portfolio with fewer unexpected outcomes. Finally, a better and more aligned portfolio is created if intra-horizon risk is incorporated into the portfolio construction process, the investment horizon of each asset in the portfolio is chosen, and customized stop-loss levels are implemented at the asset level.

Author: Oliviero Roggi
Publisher: World Scientific
ISBN: 9814641731
Category : Business & Economics
Languages : en
Pages : 166

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Book Description
Scholars and practitioners have known for a long time that risk plays an important, indeed central, role in determining the appropriate discount rate to be used in a sophisticated valuation model. In today's world, however, the very risk of survival, especially for financial institutions, is essential to the health of the world's capital markets and their impact on the global economy.Risk, Value and Default is a vital text for understanding the interaction between enterprise risk management with corporate valuation and corporate default. The book seeks to explore the interaction between the risk of default and enterprise risk, and their joint impact on firm valuation. It aims to address the problem of how corporations should deal with risk and how they can maximize shareholder value. It also examines various conceptual ways to measure risk, thereby bridging the gap between theoretical concepts and pragmatic application.The book combines sound conceptual analytics and empirical tools to provide useful information and tangible guidelines for firms, risk managers and financial analysts and advisors. Scholars and professionals with an interest in risk management, and managers, owners, creditors and potential investors in enterprises will find Risk, Value and Default a particularly useful guide to understanding the relationship between risk generation, risk management and corporate value and default from an interdisciplinary perspective.

Author: Fangda Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 32

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Book Description
The notion of "tail risk" has been a crucial consideration in modern risk management. To achieve a comprehensive understanding of the tail risk, we carry out an axiomatic study for risk measures which quantify the tail risk, that is, the behavior of a risk beyond a certain quantile. Such risk measures are referred to as tail risk measures in this paper. The two popular classes of regulatory risk measures in banking and insurance, the Value-at-Risk (VaR) and the Expected Shortfall (ES), are prominent, yet elementary, examples of tail risk measures. We establish a connection between a tail risk measure and a corresponding law-invariant risk measure, called its generator, and investigate their joint properties. A tail risk measure inherits many properties from its generator, but not subadditivity or convexity; nevertheless, a tail risk measure is coherent if and only if its generator is coherent. We explore further relevant issues on tail risk measures, such as bounds, distortion risk measures, risk aggregation, elicitability, and dual representations. In particular, there is no elicitable tail convex risk measure rather than the essential supremum, and under a continuity condition, the only elicitable and positively homogeneous monetary tail risk measures are the VaRs.

Author: Mark Carey
Publisher: University of Chicago Press
ISBN: 0226092984
Category : Business & Economics
Languages : en
Pages : 669

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Book Description
Until about twenty years ago, the consensus view on the cause of financial-system distress was fairly simple: a run on one bank could easily turn to a panic involving runs on all banks, destroying some and disrupting the financial system. Since then, however, a series of events—such as emerging-market debt crises, bond-market meltdowns, and the Long-Term Capital Management episode—has forced a rethinking of the risks facing financial institutions and the tools available to measure and manage these risks. The Risks of Financial Institutions examines the various risks affecting financial institutions and explores a variety of methods to help institutions and regulators more accurately measure and forecast risk. The contributors--from academic institutions, regulatory organizations, and banking--bring a wide range of perspectives and experience to the issue. The result is a volume that points a way forward to greater financial stability and better risk management of financial institutions.

Author: H. Gifford Fong
Publisher: World Scientific
ISBN: 9812700862
Category : Business & Economics
Languages : en
Pages : 233

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Book Description
Risk management is a foundation discipline for the prudent conduct of investment management. Being effective requires ongoing evolution and adaptation. In The World of Risk Management, an expert team of contributors that include Nobel Prize laureates Robert C Merton and Harry M Markowitz addresses the important issues arising in the practice of risk management. A common thread among these distinguished articles is a rigorous theoretical or conceptual basis. Illustrated with full color figures throughout, they discuss topics ranging from broad policy considerations to detailed how-to prescriptions, providing professionals and academics with useful practical implementations.

Author: Michael T. Carpenter
Publisher: John Wiley & Sons
ISBN: 0470530944
Category : Business & Economics
Languages : en
Pages : 321

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Book Description
User-friendly risk management tools, tips, and techniques for a less certain world Though a very high level of investor uncertainty, anxiety, and concern about risk now exists, the vast majority of investors do not genuinely understand investment risk-let alone how to effectively manage it. The Risk-Wise Investor offers a totally new, user-friendly, non-technical way to help you better understand and manage uncertainty and risk. This practical guide will help investors avoid many common pitfalls and make well informed, knowledge-based decisions when facing uncertainty and risk. It also shows how to implement a personalized, systematic risk management planning process that will allow you to manage the risks you face more effectively and improve the likelihood of achieving specific investment goals. Though traditional investment advice is based on taking the long view and diversifying portfolios, the information here shows how to incorporate additional risk management considerations into your plans. The Risk-Wise Investor also provides innovative insights that will help investors and their advisors better understand how to: Gain a practical, user-friendly, knowledge based understanding of risk and risk management Better understand and manage financial uncertainty and rapid change Release life-risk management skills in the world of investments Become less anxious, more knowledgeable, realistic, and potentially more successful investors Learn a new "empowering" definition of risk to more effectively address risk and uncertainty Help reduce the likelihood and potential impact of negative surprises

Author: Pranay Gupta
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
Tail risk arises at multiple stages in the investment management process - from the high level asset allocation decision down to the individual portfolio manager's process for selecting securities. We believe that conventional practices followed in these investment decision processes, largely ignore intra-horizon risk. We believe this leads to sub-optimal assessment of risk of assets, particularly in the context of potential tail risk, and leads to the construction of portfolios, which are not in sync with the risk aversion of the client.In the present paper we propose a composite risk measure which simultaneously captures the risk of breaching a specified maximum intra-horizon drawdown threshold, as well as the risk that the performance is not met at the end of the investment horizon. We believe this captures the 'true' risk of a portfolio, much better than traditional end of horizon risk measures.We find that intra-horizon risk can represent a substantial part of the total risk, and thus needs to be managed explicitly which constructing a portfolio of assets, strategies or asset classes. We propose that varying the investment horizon and implementing a customized stop loss for each asset can help construct a portfolio where portfolio risk is kept within bounds of tolerance, and can improve performance over time.