Department of Economics and Business Economics

Expected Shortfall and Portfolio Management in Contagious Markets

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

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Expected Shortfall and Portfolio Management in Contagious Markets. / Buccioli, Alice; Kokholm, Thomas; Nicolosi, Marco.

In: Journal of Banking & Finance, Vol. 102, No. May, 2019, p. 100-115.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Harvard

Buccioli, A, Kokholm, T & Nicolosi, M 2019, 'Expected Shortfall and Portfolio Management in Contagious Markets', Journal of Banking & Finance, vol. 102, no. May, pp. 100-115. https://doi.org/10.1016/j.jbankfin.2019.03.003

APA

Buccioli, A., Kokholm, T., & Nicolosi, M. (2019). Expected Shortfall and Portfolio Management in Contagious Markets. Journal of Banking & Finance, 102(May), 100-115. https://doi.org/10.1016/j.jbankfin.2019.03.003

CBE

MLA

Buccioli, Alice, Thomas Kokholm and Marco Nicolosi. "Expected Shortfall and Portfolio Management in Contagious Markets". Journal of Banking & Finance. 2019, 102(May). 100-115. https://doi.org/10.1016/j.jbankfin.2019.03.003

Vancouver

Author

Buccioli, Alice ; Kokholm, Thomas ; Nicolosi, Marco. / Expected Shortfall and Portfolio Management in Contagious Markets. In: Journal of Banking & Finance. 2019 ; Vol. 102, No. May. pp. 100-115.

Bibtex

@article{5feb206e07394c0b89c90097a7d7fb8f,
title = "Expected Shortfall and Portfolio Management in Contagious Markets",
abstract = "We study the impact of market contagion on portfolio management. To model possible recurrence in the arrival of extreme events, we equip classic Poisson jumps with long memory via past-weighted randomization of the likelihood of their occurrences (Hawkes processes). Within this framework, we tackle the problem of optimal portfolio selection in terms of Expected Shortfall (ES). We use the generalized method of moments to estimate the model on three US stock indexes, representing three major sectors of the US economy. The moment conditions of the model are computed efficiently in closed form applying a novel technique. Given parameter estimates we maximize (at a monthly frequency in the period 2001-2016) the expected return subject to a constraint on ES of a portfolio consisting of the three US sector indexes. We find that the weights of the optimal portfolio are significantly adjusted when the level of contagion is high. Finally, we perform an extensive out-of-sample back-test of the model's ability to measure ES and find that the Hawkes jump-diffusion model outperforms two traditional models that are commonly implemented.",
keywords = "Hawkes process, Contagion, Expected shortfall, Back-testing, Portfolio management",
author = "Alice Buccioli and Thomas Kokholm and Marco Nicolosi",
year = "2019",
doi = "10.1016/j.jbankfin.2019.03.003",
language = "English",
volume = "102",
pages = "100--115",
journal = "Journal of Banking & Finance",
issn = "0378-4266",
publisher = "Elsevier BV",
number = "May",

}

RIS

TY - JOUR

T1 - Expected Shortfall and Portfolio Management in Contagious Markets

AU - Buccioli, Alice

AU - Kokholm, Thomas

AU - Nicolosi, Marco

PY - 2019

Y1 - 2019

N2 - We study the impact of market contagion on portfolio management. To model possible recurrence in the arrival of extreme events, we equip classic Poisson jumps with long memory via past-weighted randomization of the likelihood of their occurrences (Hawkes processes). Within this framework, we tackle the problem of optimal portfolio selection in terms of Expected Shortfall (ES). We use the generalized method of moments to estimate the model on three US stock indexes, representing three major sectors of the US economy. The moment conditions of the model are computed efficiently in closed form applying a novel technique. Given parameter estimates we maximize (at a monthly frequency in the period 2001-2016) the expected return subject to a constraint on ES of a portfolio consisting of the three US sector indexes. We find that the weights of the optimal portfolio are significantly adjusted when the level of contagion is high. Finally, we perform an extensive out-of-sample back-test of the model's ability to measure ES and find that the Hawkes jump-diffusion model outperforms two traditional models that are commonly implemented.

AB - We study the impact of market contagion on portfolio management. To model possible recurrence in the arrival of extreme events, we equip classic Poisson jumps with long memory via past-weighted randomization of the likelihood of their occurrences (Hawkes processes). Within this framework, we tackle the problem of optimal portfolio selection in terms of Expected Shortfall (ES). We use the generalized method of moments to estimate the model on three US stock indexes, representing three major sectors of the US economy. The moment conditions of the model are computed efficiently in closed form applying a novel technique. Given parameter estimates we maximize (at a monthly frequency in the period 2001-2016) the expected return subject to a constraint on ES of a portfolio consisting of the three US sector indexes. We find that the weights of the optimal portfolio are significantly adjusted when the level of contagion is high. Finally, we perform an extensive out-of-sample back-test of the model's ability to measure ES and find that the Hawkes jump-diffusion model outperforms two traditional models that are commonly implemented.

KW - Hawkes process

KW - Contagion

KW - Expected shortfall

KW - Back-testing

KW - Portfolio management

U2 - 10.1016/j.jbankfin.2019.03.003

DO - 10.1016/j.jbankfin.2019.03.003

M3 - Journal article

VL - 102

SP - 100

EP - 115

JO - Journal of Banking & Finance

JF - Journal of Banking & Finance

SN - 0378-4266

IS - May

ER -