Optimal portfolio choice and stock centrality for tail risk events
Optimal portfolio choice and stock centrality for tail risk events
We propose a novel risk matrix to characterize the optimal portfolio choice of an investor with tail concerns. The diagonal of the matrix contains the Value-at-Risk of each asset in the portfolio and the off-diagonal the pairwise Delta-CoVaR measures reflecting tail connections between assets. First, we derive the conditions under which the associated quadratic risk function has a closed-form solution. Second, we examine the relationship between portfolio risk and eigenvector centrality. Third, we show that portfolio risk is not necessarily increasing with respect to stock centrality. Forth, we demonstrate under certain conditions that asset centrality increases the optimal weight allocation of the asset to the portfolio. Overall, our empirical study indicates that a network topology which exhibits low connectivity is outperformed by high connectivity based on a Sharpe ratio test.
q-fin.PM
Katsouris, Christis
c00ef5df-703d-4372-bfd4-a2df0d664f95
1 December 2021
Katsouris, Christis
c00ef5df-703d-4372-bfd4-a2df0d664f95
[Unknown type: UNSPECIFIED]
Abstract
We propose a novel risk matrix to characterize the optimal portfolio choice of an investor with tail concerns. The diagonal of the matrix contains the Value-at-Risk of each asset in the portfolio and the off-diagonal the pairwise Delta-CoVaR measures reflecting tail connections between assets. First, we derive the conditions under which the associated quadratic risk function has a closed-form solution. Second, we examine the relationship between portfolio risk and eigenvector centrality. Third, we show that portfolio risk is not necessarily increasing with respect to stock centrality. Forth, we demonstrate under certain conditions that asset centrality increases the optimal weight allocation of the asset to the portfolio. Overall, our empirical study indicates that a network topology which exhibits low connectivity is outperformed by high connectivity based on a Sharpe ratio test.
Text
2112.12031v1
- Author's Original
More information
Published date: 1 December 2021
Keywords:
q-fin.PM
Identifiers
Local EPrints ID: 471743
URI: http://eprints.soton.ac.uk/id/eprint/471743
PURE UUID: 904f1219-45d3-4d56-93bb-6a28554695a1
Catalogue record
Date deposited: 17 Nov 2022 17:40
Last modified: 17 Mar 2024 03:49
Export record
Contributors
Author:
Christis Katsouris
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics