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Diversification in Heavy-Tailed Portfolios: Properties and Pitfalls
Company: Annals of Actuarial Science
Company Url: Click here to open
Year Of Publication: 2013
Month Of Publication: March
Resource Link: Click here to open
Pages: 26-45
Download Count: 0
View Count: 1021
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 5-25-2014
Publisher: Administrator
Summary
We discuss risk diversification in multivariate regularly varying models and provide explicit formulas for Value-at-Risk asymptotics in this case. These results allow us to study the influence of the portfolio weights, the overall loss severity, and the tail dependence structure on large portfolio losses. We outline sufficient conditions for the sub- and superadditivity of the asymptotic portfolio risk in multivariate regularly varying models and discuss the case when these conditions are not satisfied. We provide several examples to illustrate the resulting variety of diversification effects and the crucial impact of the tail dependence structure in infinite mean models. These examples show that infinite means in multivariate regularly varying models do not necessarily imply negative diversification effects. This implication is true if there is no loss-gain compensation in the tails, but not in general. Depending on the loss-gain compensation, asymptotic portfolio risk can be subadditive, superadditive, or neither.
(volume 7, number 1)
Author(s)
Mainik, Georg Sign in to follow this author
Embrechts, Paul Sign in to follow this author
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