Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2005-01-17 Number: 05-008/2 Author-Name: Namwon Hyung Author-Email: email@example.com Author-Workplace-Name: Seoul City University Author-Name: Casper G. de Vries Author-Email: firstname.lastname@example.org Author-Workplace-Name: Faculty of Economics, Erasmus Universiteit Rotterdam Title: Portfolio Diversification Effects of Downside Risk Abstract: Risk managers use portfolios to diversify away the unpriced risk of individual securities. In this article we compare the benefits of portfolio diversification for downside risk in case returns are normally distributed with the case of fat-tailed distributed returns. The downside risk of a security is decomposed into a part which is attributable to the market risk, an idiosyncratic part, and a second independent factor. We show that the fat-tailed-based downside risk, measured as value-at-risk (VaR), should decline more rapidly than the normal-based VaR. This result is confirmed empirically.
This discussion paper has resulted in a publication in the Journal of Financial Econometrics. (2005, 3(1), 107-125.) Classification-JEL: G0; G1; C2 Keywords: Diversification; Value-at-Risk; Decomposition File-Url: http://papers.tinbergen.nl/05008.pdf File-Format: application/pdf File-Size: 314505 bytes Handle: RePEc:tin:wpaper:20050008