Optimal Expected-Shortfall Portfolio Selection with Copula-Induced Dependence. Issue 1 (2nd January 2018)

• Record Type: Journal Article
• Authors: Gijbels, Irène; Herrmann, Klaus
• Is Part Of: Applied mathematical finance. Volume 25:Issue 1(2018)
• Page Start: 66
• Page End: 106
• Publication Date: 2018-01-02
• Subjects: Aggregation of risk -- capital allocation -- copula -- dependence -- portfolio selection -- Smolyak integration -- sums of random variables; Business mathematics -- Periodicals; 650.0151
• DOI: 10.1080/1350486X.2018.1492347
• Languages: English
• ISSNs: 1350-486X

Abstract

ABSTRACT: We provide a computational framework for the selection of weights( ω 1, …, ω d ) that minimize the expected shortfall of the aggregated riskZ = ∑ i = 1 d ω i X i . Contrary to classic and recent results, we neither restrict the marginal distributions nor the dependence structure of( X 1, …, X d ) to any specific type. While the margins can be set to any absolutely continuous random variable with finite expectation, the dependence structure can be modelled by any absolutely continuous copula function. A real-world application to portfolio selection illustrates the usability of the new framework.