Journal
ANNALS OF OPERATIONS RESEARCH
Volume 176, Issue 1, Pages 293-309Publisher
SPRINGER
DOI: 10.1007/s10479-008-0468-1
Keywords
Fat-tailed distributions; Stable distributions; Downside risk; Average value-at-risk; Conditional value-at-risk; Risk budgeting
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Funding
- Division of Mathematical, Life and Physical Sciences, College of Letters and Science, University of California, Santa Barbara
- Deutschen Forschungsgemeinschaft
- Deutscher Akademischer Austausch Dienst
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Portfolio risk estimation in volatile markets requires employing fat-tailed models for financial returns combined with copula functions to capture asymmetries in dependence and an appropriate downside risk measure. In this survey, we discuss how these three essential components can be combined together in a Monte Carlo based framework for risk estimation and risk capital allocation with the average value-at-risk measure (AVaR). AVaR is the average loss provided that the loss is larger than a predefined value-at-risk level. We consider in some detail the AVaR calculation and estimation and investigate the stochastic stability.
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