Dresden 2009 – wissenschaftliches Programm
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AGSOE: Arbeitsgruppe Physik sozio-ökonomischer Systeme
AGSOE 3: Financial Markets and Risk Management II
AGSOE 3.1: Vortrag
Montag, 23. März 2009, 10:15–10:45, BAR 205
The instability of downside risk measures — Istvan Varga-Haszonits1,2 and •Imre Kondor1,3,4 — 1Eötvös University, Budapest — 2Analytics Department of Fixed Income Division, Morgan Stanley Hungary Analytics — 3Collegium Budapest — 4Parmenides Foundation, Munich
We study the feasibility and noise sensitivity of portfolio optimization under some downside risk measures (Value-at-Risk, Expected Shortfall, and semivariance) when they are estimated by fitting a parametric distribution on a finite sample of asset returns. We find that the existence of the optimum is a probabilistic issue, depending on the particular random sample, in all three cases. At a critical combination of the parameters of these problems we find an algorithmic phase transition, separating the phase where the optimization is feasible from the one where it is not. This transition is similar to the one discovered earlier for Expected Shortfall based on historical time series. We employ the replica method to compute the phase diagram, as well as to obtain the critical exponent of the estimation error that diverges at the critical point. A comparison of the historical and parametric estimators is given. The analytical results are corroborated by Monte Carlo simulations.