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Title: The economic value of controlling for large losses in portfolio selection
Authors: Dias, Alexandra
First Published: 16-Jun-2016
Publisher: Elsevier
Citation: Journal of Banking and Finance, 2016, (in press)
Abstract: Research on asset pricing has shown that investor preferences include asymmetry and tail heaviness which affects the composition of optimal portfolios. This article investigates the out-of-sample economic value of introducing the risk of very large losses in portfolio selection. We combine mean–variance analysis with conditional Value-at-Risk using the subadditivity property of conditional Value-at-Risk, and we introduce a two stage method that preserves diversification while controlling for large losses. We find that strategies that account both for variance and the probability of large losses outperform efficient mean–variance portfolios, during and after the global financial crisis.
DOI Link: 10.1016/j.jbankfin.2016.04.016
ISSN: 0378-4266
eISSN: 1872-6372
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © Elsevier, 2016. This article is distributed under the terms of the Creative Commons Attribution-Non Commercial-No Derivatives License ( ), which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Description: Following the 18 month embargo period the above license will apply.
Appears in Collections:Published Articles, School of Management

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