Down-side risk metrics as portfolio diversification strategies across the Global Financial Crisis

David E. Allen, Michael McAleer, Robert J. Powell, Abhay Singh

Research output: Contribution to journalArticleResearchpeer-review

Abstract

This paper features an analysis of the effectiveness of a range of portfolio diversification strategies, with a focus on down-side risk metrics, as a portfolio diversification strategy in a European market context. We apply these measures to a set of daily arithmetically-compounded returns, in U.S. dollar terms, on a set of ten market indices representing the major European markets for a nine-year period from the beginning of 2005 to the end of 2013. The sample period, which incorporates the periods of both the Global Financial Crisis (GFC) and the subsequent European Debt Crisis (EDC), is a challenging one for the application of portfolio investment strategies. The analysis is undertaken via the examination of multiple investment strategies and a variety of hold-out periods and backtests. We commence by using four two-year estimation periods and a subsequent one-year investment hold out period, to analyse a naive 1/N diversification strategy and to contrast its effectiveness with Markowitz mean variance analysis with positive weights. Markowitz optimisation is then compared to various down-side investment optimisation strategies. We begin by comparing Markowitz with CVaR, and then proceed to evaluate the relative effectiveness of Markowitz with various draw-down strategies, utilising a series of backtests. Our results suggest that none of the more sophisticated optimisation strategies appear to dominate naive diversification.
LanguageEnglish
Article number6
Number of pages18
JournalJournal of risk and financial management
Volume9
Issue number2
DOIs
Publication statusPublished - 21 Jun 2016
Externally publishedYes

Fingerprint

Portfolio diversification
Diversification strategy
Downside risk
Global financial crisis
Investment strategy
Portfolio investment
Debt crisis
Mean-variance analysis
Market index
Conditional value at risk
Diversification

Bibliographical note

Copyright 2016 by the authors; licensee MDPI, Basel, Switzerland. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

  • portfolio diversification
  • Markowitz analysis
  • downside risk
  • CVaR
  • draw-down

Cite this

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title = "Down-side risk metrics as portfolio diversification strategies across the Global Financial Crisis",
abstract = "This paper features an analysis of the effectiveness of a range of portfolio diversification strategies, with a focus on down-side risk metrics, as a portfolio diversification strategy in a European market context. We apply these measures to a set of daily arithmetically-compounded returns, in U.S. dollar terms, on a set of ten market indices representing the major European markets for a nine-year period from the beginning of 2005 to the end of 2013. The sample period, which incorporates the periods of both the Global Financial Crisis (GFC) and the subsequent European Debt Crisis (EDC), is a challenging one for the application of portfolio investment strategies. The analysis is undertaken via the examination of multiple investment strategies and a variety of hold-out periods and backtests. We commence by using four two-year estimation periods and a subsequent one-year investment hold out period, to analyse a naive 1/N diversification strategy and to contrast its effectiveness with Markowitz mean variance analysis with positive weights. Markowitz optimisation is then compared to various down-side investment optimisation strategies. We begin by comparing Markowitz with CVaR, and then proceed to evaluate the relative effectiveness of Markowitz with various draw-down strategies, utilising a series of backtests. Our results suggest that none of the more sophisticated optimisation strategies appear to dominate naive diversification.",
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Down-side risk metrics as portfolio diversification strategies across the Global Financial Crisis. / Allen, David E.; McAleer, Michael; Powell, Robert J.; Singh, Abhay.

In: Journal of risk and financial management, Vol. 9, No. 2, 6, 21.06.2016.

Research output: Contribution to journalArticleResearchpeer-review

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